Howard Marks, a well-known investor stated: ‘Investment success comes not from buying good things, but from buying them at a favourable price’. Today, Chinese companies that have not recovered from the property crisis are offering such investment opportunities. We will look at companies that can be considered ‘money-making machines’. We will use two metrics to evaluate them: price to free cash flow (P/FCF) ratio and shareholder return, which takes into account profit distributions to investors and debt repayments.
Table of contents:
Baidu – Chinese Google
Baidu is a Chinese technology company, best known as the operator of China's largest internet search engine. However, the company's activities go far beyond this one service - Baidu is actively investing in the development of artificial intelligence, autonomous vehicles and other advanced future technologies.
The past five years have not been a period of explosive growth for the company, with sales increasing at an annual rate of 4.9 per cent. However, Baidu generated significant cash flow during this time. The price to free cash flow (P/FCF) ratio for the company currently stands at 10.7, which for a technology company may indicate a potential undervaluation. In comparison, Alphabet (owner of Google), Baidu's main competitor, has this ratio at 43. This means that Baidu is currently nearly four times cheaper than its biggest rival.
Baidu's additional advantage is its shareholders yield, which is 8.3 per cent per annum, compared to just 3 per cent for Alphabet. It is also worth noting that much of Baidu's cash generation in recent quarters has been used to pay down debt. As a result, the company now has more cash than liabilities, further strengthening its financial position.
Source: Conotoxia MT5, Baidu, Daily
ZTO Express – Chinese FedEx
For many Western investors, Chinese brands may seem unfamiliar and alien, as they often focus their business exclusively on China's domestic market. A good example is ZTO Express, which is one of China's leading courier companies specialising in express parcel delivery. Through its partnerships with e-commerce giants such as Alibaba, ZTO plays a key role in e-commerce-related logistics in China.
ZTO Express' revenue has grown at an impressive rate of 15 per cent per year for the past five years. Despite this, the company's share price has steadily declined year on year. This situation has led to a significant divergence between the company's operating performance and its stock market valuation. The price to free cash flow (P/FCF) ratio for ZTO currently stands at 18.7, which may indicate that the company is valued at the right level. By comparison, US parcel giant FedEx is valued at a P/FCF ratio of 25.
The biggest downside for ZTO Express is its relatively low shareholder yield, which is only 2.5 per cent. This means that the company pays out a relatively small proportion of the profits it generates to investors, which may limit its attractiveness in the eyes of potential shareholders.
Source: Conotoxia MT5, ZTOExpres, Daily
Tencent – Chinese Facebook
Tencent is a Chinese technology conglomerate that has gained international recognition for its wide range of online services and products. Among the best known of these are the instant messaging service WeChat, the social network QQ and numerous online games. The company also invests in a variety of industries: artificial intelligence, fintech or entertainment. It is safe to say that Tencent is the Chinese equivalent of Meta Platforms.
Looking at Tencent's financial performance, it is easy to see where its advantage lies. Over the past five years, the company's average annual revenue growth has been 12.5 per cent. Currently, Tencent's valuation, as measured by its P/FCF ratio, is 16.4, which makes it far more attractive compared to Meta Platforms, whose valuation at the same time reaches 30.5.
Furthermore, the shareholders yield in the form of dividends and share buybacks is 3.6 per cent, compared to only 2 per cent for Meta Platforms. This means that the company is still actively investing a significant portion of its profits.
Source: Tradingview
Alibaba – Chinese Amazon
Alibaba is a global e-commerce leader, known for its Taobao and Tmall platforms, which enable commerce for both consumers and businesses. The company is also active in the areas of cloud services (Alibaba Cloud), online payments (Alipay) and logistics (Cainiao). It operates the largest e-commerce shop in China, hence it can be compared to the US Amazon.
Although Alibaba has experienced dynamic growth of 17 per cent per year in the past five years, this growth has not fully translated into profits. Nevertheless, the price-to-earnings ratio currently stands at 13.7, compared to 55.7 for Amazon, meaning that Alibaba is almost five times cheaper than its US competitor.
An additional advantage is that Alibaba pays out as much as 10.2 per cent of value to investors, mainly through share buybacks. In comparison, the rate of return on holding Amazon shares is only 0.6 per cent per year.
Source: Conotoxia MT5, Alibaba, Daily
Summary
Let us once again recall the words of Howard Marx: ‘Investment success comes not from buying good things, but from buying them at a favourable price’. Chinese companies, despite the difficulties following the real estate crisis, offer attractive investment opportunities, especially compared to US giants. Baidu, ZTO Express, Tencent and Alibaba, despite their various challenges, stand out for their low valuations relative to cash flow generated and high shareholder returns. Baidu and Tencent are particularly interesting due to their low P/FCF ratios, while Alibaba offers a high return on investment. Compared to US companies such as Alphabet, FedEx or Amazon, Chinese companies may be a more viable choice, offering higher returns and lower valuations.
Grzegorz Dróżdż, CIIA, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
The above trade publication does not constitute an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No. 596/2014 of April 16, 2014. It has been prepared for informational purposes and should not form the basis for investment decisions. Neither the author of the publication nor Conotoxia Ltd. shall be liable for investment decisions made on the basis of the information contained herein. Copying or reproducing this publication without written permission from Conotoxia Ltd. is prohibited. Past performance is not a reliable indicator of future results.
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