Top 3 Chinese stocks to watch as COVID-19 worsens

Why the three largest Chinese tech companies – Baidu, Alibaba and Tencent – are analysts’ top equity picks during these uncertain times.

Like FAANG (Facebook, Amazon, Apple, Netflix, and Google) in the US, China’s three most valuable technology firms – Baidu, Alibaba, and Tencent – otherwise known as BAT, also boast market capitalisations that will dwarf even some national GDPs.

While most companies are expecting their earnings for the first two quarters of 2020 to be hit hard by the coronavirus outbreak, analysts say Alibaba and Tencent could potentially profit from the epidemic, with the earnings forecast for Baidu softer alongside more resilient share price predictions.

With going long and short a possibility for CFD traders, here is why analysts are favouring the stocks of these Chinese tech titans, even as COVID-19 continues to spread domestically and globally.

1. Baidu Inc. (NASDAQ: BIDU)

Q1 group earnings to be negatively impacted by 65%

Morningstar Asia Equity Research Analyst Chelsey Tam says Baidu is likely to experience a drop in overall revenue because of its large advertising exposure.

She noted that there will be an overall negative impact to the group’s core advertising revenue of as much as 65% in the first quarter of FY2020, with more companies lowering their advertising budgets amid weaker economic activity during this time.

Tam added that the long-awaited advertising spending recovery from 2019's Q3 losses is expected to be delayed as a result of reduced business demand for ads, which will affect advertising-focused firms like Weibo and Baidu the most. Advertising made up 73% of Baidu’s total revenue in the third quarter of 2019.

Although Morningstar anticipates a surge in searches related to the coronavirus on Baidu, which could lead to higher conversion for some medical ads, the overall impact still skews against the business with medical ads estimated to account for less than 20% of Baidu's core advertising revenue.

Baidu share price analysis

Since the outbreak of COVID-19, the search engine firm’s share price has plummeted by nearly 10%.

Prior to the health epidemic, Baidu shares were trading at US$139.61 per share on 21 January. Stocks are now moving along the US$125.80 mark.

Due to the widening spread of the coronavirus, share price has been down as much as 14.5% this year.

Still, of the 36 investment analysts polled by FactSet at the start of February 2020, 27 have rated the stock a ‘buy’, one gave an ‘outperform’ rating, while eight put their money on ‘hold’.

2. Alibaba Group (NYSE: BABA)

E-commerce could see 64% upside to revenue amid COVID-19

According to IG Asia analyst Reo Liao, ‘the coronavirus will be an adversity, but also an opportunity for Alibaba’.

‘Because of the need to isolate human contact, Alibaba has observed noticeable increment in average basket size under its two fresh food brand, Freshippo and Taoxianda, during the coronavirus outbreak period,’ Liao wrote in a client note on Monday 17 February.

‘Alibaba believed that it was due to consumers’ migration to online purchasing of fresh goods and daily necessities, that resulted in a significant increase in grocery online shopping,’ he added.

E-commerce, in particular, could see a 64% upside to revenue, on the basis that there would be a positive spike in demand for online shopping, especially for groceries, as more people stay away from public places, according to Morningstar research.

Go long or short on Baidu, Alibaba, and Tencent shares by trading CFDs with IG today.

Alibaba share price analysis

The internet group also reported a solid last quarter of 2019, in which net income attributable to ordinary shareholders came in RMB52.3 billion (US$7.5 billion), and net income was RMB50.1 billion (US$7.2 billion). Non-GAAP (Unadjusted) net income was RMB46.5 billion (US$6.7 billion), an increase of 56% year-over-year.

Following the earnings report, Alibaba’s American Depository Share price had rallied over 2%.

On the back of this, IG’s Liao has given a price target of US$250 for the coming months, with a possible entry mark of US$205 per share.

He cited Alibaba’s fast-expanding China network into lower-tier cities in the December 2019 quarter, and growing demand for online grocery shopping during the virus outbreak period, as the two main reasons for his price prediction.

‘It is particularly worth noting that over 60% of the increment of active customers came from China’s less developed areas. By encouraging more brands to penetrate into low tier cities in China, Alibaba’s gross merchandise volume in 11.11 Global shopping festival reached a new record of RMB 268 billion,’ he wrote.

Fifty-one out of 57 analysts on FactSet had also rated Alibaba's ADS a 'buy'.

3. Tencent Holdings (HKG: 0700)

Tencent’s gaming, video, and B2B segments primed for growth

According to Morningstar’s Tam, gaming and digital entertainment companies like Tencent are potential long-term beneficiaries of the current market uncertainty created by COVID-19, and should see benefits outside of their bread-and-butter businesses because of faster adoption of its digital offerings.

That is because with more people staying home for the foreseeable future – or at least until the virus is contained, Tencent’s games, music, and online video segments, as well as its B2B business arms, are expected to do well.

It was reported by SINA news that Tencent’s flagship gaming title ‘Honor of Kings’ grossed an estimated RMB2 billion on Chinese New Year eve – the same time as the virus outbreak –a 54% year-over-year increase.

Online video – a major form of home entertainment, should also see a surge in subscriptions.

‘We predict that online memberships could increase as a result, some of whom could be first-time subscribers. While some subscribers are expected to drop off after the epidemic is contained, we think some of them who never paid for online videos might stay if they enjoy the experience,’ says Tam.

The outbreak has also led to Tencent’s largest-ever trial of certain business-to-business (B2B) products, such as online office tools and cloud services. Remote work tools such as Tencent’s WeChat Enterprise crashed temporarily from the spike in traffic amid the outbreak.

Tencent share price analysis

With a market capitalisation of US$572 billion, Tencent is the second most valuable Asian company today. That market cap - achieved on 17 February - works out to a valuation of around HK$418 per share, an all-time high for the stock.

This would have appeared unlikely only three weeks ago, when the stock had dipped by 2.66% to a two-month low of HK$373 per share, following the outbreak of the Wuhan coronavirus. However, it quickly rebounded in the subsequent two weeks, even surpassing its initial drop rate.

Since that low recorded on 31 January – a week out from the virus making global headlines, Tencent’s share price has soared as much as 12.5%.

On the back of these facts and figures, Tam has given the Tencent stock a near-term share price target of US$460, and a ‘wide’ economic moat rating. A ‘wide’ economic moat means a company is likely to keep competitors at bay for an extended period of time.

Of the 43 brokers polled by FactSet, 40 rated the stock a ‘buy’, two rated it an ‘outperform’, and five rated it a ‘hold’.

How to go long and short on markets

If you want to take a long or short position on a market - including Baidu, Alibaba and Tencent, you can open a CFD trading account with IG. CFD trading is the buying (going long) and selling (going short) of contracts for the difference in price of an asset, between the opening and closing of your position.

CFDs and are derivative products, because they enable you to speculate on financial markets such as shares, forex, indices and commodities without having to take ownership of the underlying assets.

Both methods use leverage, which means you only have to put up a small margin (deposit) to gain exposure to the full value of the trade. This can magnify your potential profit, but also your potential loss.

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