My thoughts on the Chinese stock market right now and some undervalued sectors and companies

There are decades where nothing happens and there are weeks where decades happen

There are weeks where decades happen and well the past two weeks have felt exactly like that. I precisely remember the day when photos of the Chinese Premier meeting a man with a very uhm peculiar haircut were released to the world. The media was rife with speculation but those like us who actually follow and believe in China knew what was coming; this wasn’t just a regular meeting, it was the world’s oldest continuous civilization revealing its true capabilities for the world to see and take note. The Dragon (obviously not me) had bide its time for far too long and what followed shocked and awed the world at the same time; the media in the West started coping and S(c)am Altman started trembling. A little known Chinese quant hedge fund took $6 million and a small lean team and whacked U.S. big tech names trading at egregious valuations with a trillion dollar punch. Companies like Nvidia and Broadcom, whose stocks were not just priced for price but instead infinite growth, shed market value upwards of $500 billion and fell off a literal cliff. The country which had been lambasted for so long for “only imitating” just managed to out innovate Silicon Valley, which the Western media would have you believe to be the focal point of innovation in the world.

What really fascinates me about this whole project is that it wasn’t built by a large corporation like Alibaba or Tencent with massive R&D budgets and teams to boot but instead by a small lean team working on a side project; this is precisely what made Silicon Valley so unique in its hayday, small innovators from working class or middle class upbringings working out of their garage to come up with an innovative product and then challenging large corporations in the open market. This has now for all practical purposes completely ceased to exist and Silicon Valley is now full of grifters trying to scam investors and the general public for a quick buck. When you have gamblers like Masayoshi Son- who is willing to invest in anything that has technology in the name without doing either doing any due diligence on the product or perhaps more sinisterly being involved in the grifting himself- masquerading as “investors” what can we even expect?.

Just over a year ago, Western media piled article upon article stating that President Xi had killed innovation in China and that China would never be able to compete with Silicon Valley. Well guess what- perhaps this is the best example of projection out there- China has just proven to the world that it can out innovate Silicon Valley and beat it at its own game. As a double whammy, Elon Musk has just shut down USAID so very few are now asking the age old cliché- “at what cost?”.

Now this raises a few questions for us investors:-

• Is this rally sustainable and is it wise to invest now?

• Are there still stocks in the Chinese market unaffected by this rally that can end up being good investments?

I’ll try and answer all these questions beginning first with talking about whether this rally is sustainable and if it’s wise to invest now.

---

Is the rally sustainable and is it wise to invest now?

---

Well allow me to begin with one of my favourite and perhaps most used quote from the Wolf of Wall Street spoken by one of my favourite actors- Matthew McConaughey. “The first rule of the stock market is that nobody, whether you’re Warren Buffett or Jimmy Buffett, knows whether a stock is going to go up, down, sideways, or in fucking circles”. The Chinese market is perhaps the best example of this; we’ve seen rallies time and time again over the last four or five years which excite investors pushing prices up 20-30% all for it to end up fading out in the space of a few weeks. Most recently, we witnessed this in October 2024.

All I’m trying to say is that it’s truly futile to try and time the market arbitrarily especially in a volatile securities market like in China and Hong Kong. I’m not saying that timing the market is a futile endeavor or that it cannot be timed at all; all great investors including Warren Buffett often do and have timed the markets but this cannot be done arbitrarily or you’ll end up getting severely burnt. The only parameter that can guarantee a somewhat decent success rate when timing the market is valuations. An investment is only as good as the current valuation you pay relative to its future earnings and cash growth everything else is just speculation. As David Tepper outlined in his now famous October 24 CNBC interview- his sole parameter and hedge for investing in China is valuations. Having a solid parameter like this is what enabled him to have conviction on his bets when the market crashed after the rally and further add to his Chinese tech positions.

Only buying something at a cheap valuation relative to future growth can enable you to have enough conviction to hold onto and add to your portfolio during market downturns. If your parameter for buying into the Chinese stock market is market sentiment and news then well I hope your local pastor will be able to help through the difficult times that you might have to endure through if things do end up going south. If you want to avoid turning to religion to console yourself then it’s best to be completely honest and transparent with yourself about two things;-

• Do I know this company well enough?

• Am I paying the right valuation?

Once you’re clear about these two things then things start to become a lot simpler- a stock isn’t necessarily expensive if it’s gone up and it isn’t necessarily cheap if it goes down. Just like we live our lives in relative poverty, stocks should be bought at valuations that are cheap relative to the future growth that you can project out. Let’s take the example of Xiaomi to further drive this point home.

Xiaomi’s stock has gone up about 236% at the time of this post’s writing and like pandawatch on X very humorously put it- “they risk their employees not showing up to work and instead going to vacation with their mistresses”. Even after this mega rally, the stock can still be an amazing investment if you believe that the company can get to a $500 billion (USD) valuation by 2035 (I do). If you believe that the company can become the second largest phone OEM, second to third largest appliance OEM, and can sell 2-3 million cars by 2035 then it easily warrants the aforementioned valuation in the future and thus is an excellent investment even now.

Well now, I hear you saying, “ but Dragon, I still don’t have the ability to average up on my investments”. Well then-I have good news for you- there are still various sectors in the Chinese stock market that are still undervalued and have been completely unaffected by the recent mostly tech driven rally. I shall cover some of these sectors and stocks in the next segment and if you would like a deeper dive on any of these then please let me know and I’ll be more than happy to oblige with a dedicated post.

---

Undervalued stocks and sectors

---

Even despite this massive rally, there are still various sectors that are crucial to China’s economy and growth story that are still undervalued. These sectors range from consumer staples and retail to e-commerce to home appliance OEMs to auto OEMs to even some large cap Chinese tech names. Also with the real estate sector showing signs of recovery and having been heavily reformed over the last five years, there are opportunities in this sector as well particularly in the state owned developers who can be a sort of hybrid of a growth and high yield bond proxy play. I’ll give you a short overview of these sectors with some names that I really like, starting with retail and consumption.

---

Consumption stocks

---

This sector has been largely excluded from the recent tech driven rally. The overarching theme for 2024 and 2025 has been the recovery of China’s macro conditions and a resurgence in consumption. While I do understand that tech is sexy and cool with high growth that never fails to woo investors, consumption stocks are easier to understand for regular investors and have been proven to be excellent compounders if bought at the right price. There are many stocks in this sector that are worth taking a deeper look at. I recently made a three part series on the restaurant sector and despite a decent rally in the stock price, both Haidilao(6862.HK) and Luckin Coffee (LKNCY) are still trading at cheap valuations and Haidilao is cheaper and safer.

If you believe that Chinese consumer spending will come roaring back in 2025 after undergoing through a glut for the last three years now then Haidilao is a good name to play this theme. Some of you might be familiar with baijiu, it’s China’s national liquor and there’s a cult like following behind it with some bottles of Kweichow Moutai retailing for upwards of $1000. Moutai along with most baijiu makers have been consistent compounders in the Chinese stock market with the two largest baijiu makers- Kweichow Moutai and Wuliangye Yibin- being the highest valued liquor makers in the world. Both Moutai (600519.SH) and Wuliangye (000858.SZ) trade at cheap valuations but Moutai’s lot size is way too large for small fish like us mere mortals so I’d suggest Wuliangye. It’s a high grower and even managed to grow revenue in this tough macro; it trades at 12x earnings that is egregiously cheap relative to both its growth and defensiveness. You also get a pretty decent dividend yield to sweeten the deal.

If conventional retail is more your forte then consider looking at JD.com(9618.HK) and Miniso (9896.HK). JD is China’s third largest e-commerce retailer and the largest electronics retailer which it specializes in, particularly home appliances and phones. With the Chinese government subsidizing these items, JD stands to benefit greatly. It has exceptional management; I admire Richard Liu, he’s actionable, industrious, and very down to earth- thankfully devoid of the ostentatiousness and political ambitions that Jack Ma harbored. He always delivers on his targets and has a good relationship with the authorities. The Chinese Premier even visited a JD store in Shandong recently. JD is still cheap at 13x TTM earnings and has the potential to have a breakout year in 2025.

Miniso is also quite cheap and a beneficiary of what Amber Zhang from Baiguan calls “lipstick consumption”; I don’t like their recent acquisition of Yonghui- maybe they can’t make it work but I don’t know its too hard for me to project- I value this acquisition at zero and still believe that their core business is cheap at about 20x earnings relative to their high growth.

Lastly, if you’re more inclined towards fashion then 361 (1361.HK), Bosideng (3998.HK), and Anta (2020.HK) trade at cheap valuations. With Chinese consumers more inclined to purchase domestic brands than ever before there might be a good opportunity here to earn outsized returns. I’ve also been researching into Chinese cosmetics but that’s a topic for another day.

---

Home appliance OEMs

---

Chinese home appliance OEMs along with mobile phone OEMs have perhaps been the most successful in expanding and establishing their product and customer base outside China. Midea is the world’s largest appliance maker while Gree is the largest air conditioner manufacturer with Haier being the largest in fridges and laundry machines. All three home appliance OEMs are undervalued but I’ll only cover the two largest ones which are well diversified geographically and are still growing:-

• Midea (0300.HK) is the world’s largest appliance OEM in the world and is growing both revenues and profits by upwards of 10%. What a lot of people ignore here is that Midea also owns Kuka- one of the largest industrial robot manufacturers- and still has a lot of growth potential both inside and outside china due to a few key reasons: slow resurgence in the Chinese real estate market, government subsidies, and expansion into SE Asia, Africa and Europe. They have a partnership with Carrier in India and this is a market where they can significantly expand in provided that the sentiments and people to people relations of Indians towards Chinese improve. Even if they can just maintain current growth they’re quite cheap at current valuations of about 13x along with a juicy 4-5% dividend yield.

• Haier (6690.HK) is the world’s second largest appliance OEM and is perhaps one of the most successful Chinese brands to have expanded globally. 60% of Haier’s revenue comes from abroad. The Chinese policy of giving subsidies on appliance purchases means that not only do you have downside safety here but also the potential for exponentially high growth as people scramble to upgrade their old appliances at a much cheaper price. Haier’s European revenues have grown at a CAGR of 20% and is now heavily challenging the industry incumbent Bosch there. They also have North American exposure through GE Appliances who they acquired in 2016 and have successfully turned around into one of the top 3 appliance makers in North America. They’re the largest fridge, washing machine, and dish washer manufacturer in the world and have the potential to grow in more verticals and markets like India. Haier has been unaffected by the recent rally and can be bought for a very low 11.80x earnings and a decent 3.50% dividend yield on top.

  ---

Automobiles

---

The Chinese automobile sector is already the largest automobile market in the world by cars sold and produced and is also growing at about 6-7% a year compounded. There is a large upgradation cycle from ICE to NEV and China’s already the leader in NEV sales and technology. There are several ways to play this theme but I’ll broadly divide it into two categories- battery makers and OEMs. I’ll go into brief detail about both of them:-

• Battery makers are perhaps the best way to place this theme since it’s for all practical purposes a duopoly. BYD and CATL are the largest battery makers in the world and have superior technology to all competition in the entire world. No one, especially the previous leaders Panasonic and LG can compete with them both in terms of price and performance. The way this industry has shaped up so far, there’s almost a negligible probability that anyone will challenge these two in any serious way. CATL (300750.SZ) is planning a HK listing in 2025 and still trades very cheap relative to the future growth of the NEV industry at only 16.59x earnings ; the benefit of investing in CATL over BYD (1211.HK) is that CATL is a pure play battery maker and doesn’t have any OEM operations except for its stake in Chongqing Changan’s Avatr marquee. However BYD is not any regular OEM, they have their entire supply chain backwards integrated and produce perhaps the best batteries in the world from a cost to performance ratio perspective. Only 65% of BYD’s revenue comes from automobile and battery sales with 35% coming from BYD Electronic (phone, laptop, TV, robot vacuum cleaner etc assembly) providing a further safety net; even though the stock has rallied quite a bit based on its announcement of including smart driving in even its cheapest models the stock is in my opinion is fairly valued but not undervalued. I’d much prefer CATL for this reason.

• The Chinese auto OEM market is perhaps the most competitive market (not limited to just the automobile market) globally. There are over 100 NEV OEMs competing with each other and most of them are loss making. BYD’s obviously the largest and then a slew of other OEMs follow. Most of these are unprofitable and trade at very egregious valuations. I believe that the state owned OEMs are perhaps a good way to play this sector. Chongqing Changan (000625.SZ) makes perhaps the sexiest looking EVs in China (excluding Xiaomi of course, I’m heavily biased) and have a very solid ICE business as well through their own marquee as well as JV partnerships with Mazda and Ford. They sold 735,000+ NEVs in 2024 and grew their ICE business as well. They trade at a cheap valuation as well at only 12x PE and a low EV to EBITDA of only 5.26x times (better metric because the NEV business will take time to become profitable. They also have a partnership with Huawei through their Avatr sub brand. There are rumors floating around of a merger with Dongfeng Group ( another SOE and the group behind the Voyah marquee). Dongfeng used to trade at a negative EV but after the rumors broke out the stock rallied 24% percent (sigh) but they’re still really cheap at only a 500 million enterprise value. The way I approach this whole saga is that these SOEs have long manufacturing expertise, high production capacity, a large export base, and contribute significantly to the State themselves. The State won’t desire for these names to go insolvent since they lose out on the profits and dividends they earn from these companies hence they have every incentive to make these brands survive and compete. If the merger with Dongfeng and/or with some other auto SOEs does go through in the future then we might have an automobile behemoth on our hands that can give almost all Chinese NEV OEMs a run for their money as well as expand globally. However until this thesis does fully play out (it will take time) the stock(s) can stay low for a very long time.

  ---

Thank you for tuning in and reading my work. If you have any feedback or suggestions, I’m always open to hearing you out. I would also like to apologize for only posting once last week; I’ve not been in the best health lately and will try to be more regular with at least two posts a week from now on.