The Chinese economy continues to struggle due to weak consumer spending and property markets, rising geopolitical and trade tensions, and low international investment.
At the same time, China’s benchmark CSI 300 index remains more than 30% below its all-time high, set in 2007.
And investors, burned by the returns on real estate, have largely shunned equity investments in favor of hard assets like gold.
Could the trajectory of the market turn around?
Beijing has the power to make policy changes that could spark a rally, and it’s happened before.
On that front, China recently announced a package of policy reforms to boost markets and investor confidence.
The People’s Bank of China said it would cut its benchmark interest rate and lower the interest rate payable on existing mortgages and lower down payments for second homes. In addition, it is offering $70 billion to funds, brokers and insurers to buy Chinese stocks and said it would put up another 300 billion yuan to finance share buybacks by listed companies.
Will it work?
Possibly, but only time will tell.
The announcement of policy reforms triggered an immediate rally in Chinese equity markets at the end of September, and although the indexes have given back some of those gains, it’s worth nibbling in the margins and targeting stocks that are likely to benefit from a continued resurgence.
I suggest you look at China’s e-commerce sales platform and owner of the high-flying TEMU brand, PDD Holdings (PDD).
PDD has retreated sharply over the past several months, down nearly 20% from August’s highs, even in the face of the stimulus measures.
PDD just reported a solid quarter, but management warned of slower growth ahead. This stems largely from concern about the Chinese consumer and that PDD’s recent rapid growth may slow down. Looks like management is trying to lower expectations.
This spooked the market, given that the stock (and the company) is outperforming both Alibaba (BABA) and JD (JD) and is trading at just 9 times forward earnings.
I recommend that aggressive investors buy the stock as it is growing much faster than its competitors. Its return on equity is a stunning 49%.
PDD was only founded nine years ago (as Pinduoduo), and it has carved out a niche with its discount marketplace, which targeted shoppers in China’s lower-tier cities. PDD also encourages its shoppers to team up on social media channels to score bulk discounts. In addition, its farm-to-table channel allows it to sell fresh produce at lower prices than traditional supermarkets.
From 2023 to 2026, analysts still expect PDD’s revenue to grow at a compound growth rate of 38%. That growth should be driven by its market share gains in China and by Temu, its cross-border marketplace that connects Chinese sellers to overseas buyers.
This is a competitive market in China watched closely by regulators. In 2021, China’s antitrust regulators hit Alibaba with a record $2.75 billion fine and forced it to halt its exclusive deals with merchants and pull back its loss-leading promotions.
PDD has largely escaped intense scrutiny because it is China’s third-largest e-commerce company by annual revenue. However, Temu, PDD’s popular international bargain site is in the crosshairs of regulators and lawmakers in the West.
The issue is that small shipments from Chinese companies such as PDD are exempted from some U.S. tariffs. Earlier this year, Temu launched a new program to recruit sellers with inventory overseas to reduce the risk if legislation does change regarding the amount that can come in tariff-free.
There are other issues. PDD is facing some supplier pushback regarding slim margins, and they are also cutting some merchant fees. Yes, it is possible that growth may slow a bit if China’s consumers pull back.
This is a speculative stock right now, but downside risk is somewhat limited since the stock is trading at such a low valuation.
Plus, consumers will still be looking for deals even if China’s overall economy slows.