Beware of These 4 Overvalued Chinese Stocks

There is no doubt that China has successfully snapped back from the pandemic to post modest growth throughout last year. However, the world’s second largest economy’s strong recovery has brought with it the legitimization of Chinese stocks for U.S. investors. The recently passed Senate bill to restrict some Chinese companies from being listed on U.S. stock exchanges could severely impact investors’ confidence in Chinese stocks…

While the new administration in the United States has already reversed several executive orders signed by Trump, the new administration may not reverse course on a  change of policy on Chinese tech companies, which is in tune with the prevailing view in the Congress.

Additionally, the growing regulatory scrutiny on many leading Chinese firms’ dealings around the world has made it even harder for them to operate smoothly, both at home and abroad. In this scenario, Chinese companies that are trading at lofty valuations compared to their global peers without adequate financial and fundamental strength to justify the price gains could witness significant pullbacks in upcoming months.

Against this backdrop, it would be wise to avoid highly overvalued Chinese stocks such as Pinduoduo Inc. (PDD – Get Rating), JD.com, Inc. (JD – Get Rating), Bilibili Inc. (BILI – Get Rating), and ZTO Express (Cayman) Inc. (ZTO – Get Rating), given their lofty valuations and limited growth opportunities.

Pinduoduo Inc. (PDD – Get Rating)

Headquartered in Shanghai, China, PDD is an e-commerce mobile platform that provides a range of products like shoes, bags, apparel, food and beverage, fresh produce, electronic appliances, household goods, personal care items, fitness items, and auto accessories.

On December 21, 2020, the company announced a $500 million private share placement to a global institutional investor so that PDD can pursue its strategic priority of raising farm productivity and improving food security. It expects to use the proceeds to strengthen its cash balance and make strategic investments.

PDD appears to be extremely overvalued. In terms of trailing-12-month Price/Cash Flow, PDD is currently trading at 71.42x, 471.5% higher than the industry average of 12.50x. Moreover, the company’s trailing-12-month Price-to-Book currently stands at 56.06x, which is significantly higher than the industry average of 3.50x.

In the third quarter that ended September 30, 2020, PDD’s total revenue increased 89% year-over-year to RMB14.21 billion. However, its sales and marketing expenses rose 46% from the year-ago value to RMB10.07 billion, while research and development expenses rose 60%. The company reported a net loss of RMB784.7 million and an operating loss of RMB1.3 billion over this period.

The consensus EPS estimate for the next quarter ending March 31, 2021 indicates a 51.3% improvement year-over-year. However, its EPS is expected to decline at a rate of 37.3% per annum over the next five years. The stock has gained 427.8% over the past year.

PDD’s POWR Ratings are consistent with its underperformance. The company has an overall rating of C, which translates to Neutral in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

PDD has a grade of D for Stability, and a grade of F for Value. In the D-rated China group, it is ranked #51 of 86 stocks.

To see additional POWR Ratings for Growth, Sentiment, Momentum, and Quality for PDD, Click here.

JD.com, Inc. (JD – Get Rating)

Founded in 1998, JD is a Chinese retail infrastructure and e-commerce service provider that operates in two segments – JD Retail and New Businesses. It also provides online marketing services and logistic services for suppliers, and other business partners. The company offers its products through its website jd.com and mobile apps, as well as directly to customers.

In December, JD announced that it has become…

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