Chinese stocks have been depressed for an extended period and multiple factors have contributed to the price and time correction. This includes macroeconomic headwinds, regulatory headwinds, and geopolitical concerns. The result is that there are several undervalued Chinese stocks, but investors still seem to be gripped by fear.
In my view, this is a golden opportunity to buy quality Chinese stocks at a discount. Once sentiments reverse, these stocks will surge higher in the blink of an eye. There are a few reasons to be bullish on Chinese stocks at this point in time.
First, China looks like an attractive market for equity exposure at a time when valuations look stretched in multiple markets. Further, expansion policies are likely in China and globally. This will support growth and earnings improvement.
Additionally, Chinese leaders have pledged to tilt the stimulus towards consumers. This is likely to translate into GDP growth acceleration. With a positive outlook, let’s talk about three undervalued Chinese stocks to buy.
Li Auto (LI)
After a correction of almost 50% year-to-date, Li Auto (NASDAQ:LI) looks undervalued. My point is underscored by the fact that LI stock trades at a forward P/E of 17.8. Considering the growth trajectory and fundamentals, I am bullish on a strong reversal from current levels.
Earlier this year, Li Auto revised its growth guidance on the downside. Further, industry sentiments have been weak and the tariff on Chinese EVs by the European Union has further impacted the sector. These factors have contributed to the downside in LI stock.
However, in terms of positives, Li Auto has a strong balance sheet with a cash buffer of $13.7 billion as of Q1 2024. Further, the company is exclusively focused on expansion in China. The EU tariffs have no impact on current operations.
I also like the point that Li Auto has been aggressively investing for a technological edge. The EV company expects to launch level 3 self-driving cars by 2025. The deep correction therefore presents a good buying opportunity.
Miniso Group (MNSO)
Miniso Group (NYSE:MNSO) is another name among undervalued Chinese stocks that’s worth considering. After a correction of 17% for year-to-date, MNSO stock trades at a forward P/E of 13.4. This is attractive for a growth company and MNSO stock also offers a healthy dividend yield of 2.57%.
As an overview, Miniso is a lifestyle retailer with global presence. The company’s differentiating factors include attractive pricing and a dynamic product portfolio. This has enabled Miniso to grow at a healthy pace even amidst macroeconomic headwinds.
For Q1 2024, Miniso reported healthy revenue growth of 26% year-over-year to reach $515.7 million. For the same period, the company’s adjusted EBITDA margin increased by 200 basis points to 25.9%. I believe that healthy growth is likely to be sustained in the coming years.
My view is backed by the point that Miniso expects to open 900 to 1,100 new stores annually through 2028. During the same period, the company expects revenue growth at a CAGR of 20%. With operating leverage, I expect EBITDA margin expansion to be sustained. Considering these positives, MNSO stock looks deeply undervalued.
Yum China (YUMC)
If we look at the consumer discretionary sector, Yum China (NYSE:YUMC) looks attractive. The restaurant stock has corrected by 50% in the last 12 months and trades at a forward P/E of 14. Further, YUMC stock offers an attractive dividend yield of 2.13%.
It’s worth noting that Yum China reported 15,022 stores as of Q1 2024. The company plans to reach 20,000 stores by 2026. Aggressive store network expansion is one reason for being bullish on top-line growth. Also, between 2024 and 2026, Yum China is targeting double-digit earnings per share growth. If macroeconomic conditions improve, growth can be higher than expected. Therefore, considering the forward P/E, there is a strong case for a rally from current levels.
For 2024, Yum has guided for $1.5 billion returns to shareholders in the form of dividend and share repurchase. Considering the growth outlook for the next 24 to 26 months, it’s likely that dividend growth will remain robust.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.