The Chinese Technology Sector ETF (KWEB) has been exhibiting extremely bullish price action over the past few weeks. Following its breakout from the declining wedge at $25, the ETF continued its upward trend last week, gaining +13%.
With its large weight in Chinese technology stocks, this sector ETF is now gaining a lot of momentum and may be about to initiate a big bull run.
It would be irresponsible of me to omit the standard warning against investing in Chinese stocks, as they do entail extra risk. However, the stocks I will discuss here present such attractive risk/reward ratios that I could not resist sharing them.
Consider investing in PDD Holdings and JD.com stocks because of their highly discounted valuations, enormous EPS growth projections, technical setups, and top Zacks Ranks.
PDD Investments
Group buying deals are the specialty of PDD Holdings PDD, a Chinese e-commerce platform also known as Pinduoduo. When Colin Huang founded PDD in 2015, it gained popularity very quickly by providing products at a discount through team purchases.
By encouraging users to share deals with friends and family, it employs a social commerce model and allows users to unlock additional discounts. PDD’s platform is especially well-liked in rural and smaller Chinese cities, where it has a substantial market share. The business model of the company is centered on using social networks and cutting-edge marketing techniques to increase engagement and sales.
PDD Holdings has seen a meteoric rise in revenue over the past few years, with yearly sales rising from $2 billion in 2018 to $35 billion in the most recent year. Sales are predicted to increase by 35% and 50% this year, respectively, at this incredible rate of growth.
Pinduoduo has a Zacks Rank #1 (Strong Buy) rating after receiving some significant upgrades to its earnings estimates. The last two months’ earnings for the current quarter were revised higher by 27%, and the same period saw an 18% increase in FY24 earnings.
PDD Holdings is currently trading at a significant discount. Its one year forward earnings multiple of 16.5x is well below the market average, and its two-year median of 25.6x.
But what makes this valuation appear especially cheap is PDD’s PEG Ratio which considers EPS growth. Over the next 3-5 years EPS are forecast to grow 49.3% annually, giving it a PEG ratio of just 0.3.
JD.com
JD.com Beijing is home to JD, popularly known as Jingdong, a significant Chinese e-commerce business. In China’s B2C (business-to-consumer) online retail market, it is one of the two titans that faces off against Alibaba.
The company connects customers with merchants throughout China and offers a variety of products, such as groceries, clothing, and electronics, through both direct sales and a marketplace platform.
JD, like PDD, has an excellent Zacks Rank #1 (Strong Buy) rating, which is indicative of trending upward earnings revisions. Analysts are also projecting a massive increase in EPS of 43.8% per year over the next three to five years.
With a one-year forward earnings multiple of 10.7x, JD.com is currently significantly undervalued compared to the market average and its five-year median of 46.6x. Moreover, its PEG Ratio of 0.22 indicates a good deal by the measure.
Another notable development in JD.com is the technical setup. The price action in JD stock has been forming a textbook bottoming pattern. You can identify multiple patterns in here like a double bottom, inverse head and shoulders, cup and handle breakout, and a stage one breakout. But simply put, the stock has formed what looks like a large sideways consolidation and broken higher.
So long as the stock trades above the $29 breakout level, it should continue to rally.
In summary
It’s been a long and painful wait for Chinese tech stocks to return, but it appears possible that the bull run has started.
The increasing unpredictability in the US equity market is another reason to think about diversifying into some Chinese equities. The bull market is being thrown off balance by conflicting signals from inflation and the current shift in expectations for interest rate policy. While this may pass in the coming months, having some uncorrelated stocks on hand could be helpful in the event of a further selloff.
To sum up, let me stress that buying stocks in China carries a higher risk than buying them in the US due to the differences in standards and policies. However, PDD and JD are worthwhile endeavors if you are eager to gain market exposure.
