China's Covid-19 outbreak has infected global markets. But with the number of new cases dropping in China itself -- according to the official figures at least -- it may actually be the country that turns the corner fastest in counteracting the effects of the disease.
So where better to go shopping for defensive anti-virus stocks than in a China shop? Nomura has applied its "BCD" screen to search for Buybacks, Cash and Dividends among the stocks in its Asia portfolio. It has thrown up seven Chinese companies with overseas listings among a list of 30 top candidates culled from the Asian companies it follows.
Cash is king among those BCD components. Chinese companies are buckling under the economic shutdown of the world's second-largest economy. So Nomura believes the ones to target for defensive investment right now are those that are generating operating cash flows that easily exceed their capex.
Another favorable factor for defensive China plays is low leverage. That reduces the risk of any default. The virus scare raises that alarm in China, since it has disrupted business activity, and revenues often aren't coming in as they once were.
The Japanese investment bank does not favor seeking out companies based on their dividends right now. Instead, look now for those good cash flows to enable companies to increase their dividends later in a sustainable way. Companies may appear to be paying bigger dividends now because their revenues and earnings are suffering, leading investors into a "value trap."
Escape that trap, play some D, then get ready to go onto offense with the following 7 stocks.
Alibaba Group Holding ( (BABA) )
Everyone's favorite China play, judging by interest expressed to this writer from U.S. investors. The e-commerce Web site operator, which runs Taobao and Tmall, both benefits and suffers from the coronavirus outbreak. Chinese consumers are reining in spending. At the same time, what shopping they are doing, they are doing from home.
In announcing that sales for the December quarter rose 38%, Alibaba warned that it will likely see e-commerce revenue drop in the quarter through March. Merchants are struggling to make and deliver orders, while food delivery has dropped due to restaurants shuttering their doors during the outbreak. Alibaba is also alerting its international customers using AliExpress that there will likely be delays in delivering goods.
Alibaba is offering 1 billion yuan ($144 million) in spending subsidies for its March online-shopping "festival." Outside the virus, BABA is fighting a war for the hearts and wallets of Chinese consumers with Pinduoduo (PDD), which has made great headway in the smaller "Tier 3" Chinese cities that Alibaba initially ignored. Some investors hoped the two would reach a truce, Nomura notes, "which we think is unlikely to happen anytime soon." Both companies "need to penetrate each other's home markets for new growth opportunities."
Tencent Holdings (TCEHY)
Arguably a better China tech play than Alibaba. Tencent's videogames are seeing surging use while half of China's population is under lockdown. Top that off with the ubiquitous WeChat app, which is being used to discuss the outbreak, as well as pay for goods and services ordered while waiting for it to end.
Tencent's flagship game Honour of Kings led the China game charts over the Lunar New Year shut-in, with more than 100 million average daily users, up from the normal 65 million or so. The multiplayer battle game is called Arena of Valor in the West, so watch for its sales to surge as the virus spreads ... Tencent also owns 20% of JD.com, another favored play (below).
China Mobile ( (CHL) )
The largest mobile-phone operator in the world, China Mobile has 950 million subscribers, making it the play of choice for overseas investors looking for entry into China's telecom space. Almost 1 billion customers - talk about scale. That's three times the size of even its second-largest competitor, China Telecom (CHA).
The Chinese mobile providers are pushing ahead with the rollout of 5G service, although there's concern a lack of workers due to the virus has delayed the installation of the necessary base stations. The three main operators (China Unicom CHU rounds out the trio) had about 130,000 base stations in place by the end of 2019, and should have around 550,000 by the end of 2020. By 2025, that would enable China to have some 600 million 5G mobile users -- around 40% of the global total.
CNOOC ( (CEO) )
A contrarian play, China's third-largest oil company has cash to burn. Despite its aggressive plans (pre-virus) to boost capex spending by as much as 27% this year, it still has 25% of total assets in the cool hard stuff. CNOOC, like larger counterpart Sinopec, is part of China's experiment to expand "mixed ownership reform," opening monopolistic state-owned enterprises up to private-sector shareholders and market reforms.
Tencent, China Mobile and CNOOC make up about 45% of the Hang Seng Index, the benchmark in Hong Kong, where they have their primary listings. Hong Kong stocks have underperformed since June 10, when the first large demonstration took place against the now-dead extradition law. Couple that with the virus, and you're looking at Hong Kong stocks that are at their lowest valuation levels in the last 20 years.
JD.com ( (JD) )
Alibaba's biggest competitor, JD came in with strong numbers in Q4, with revenue up 27% year on year. But most impressively, JD.com predicted revenue would rise at least another 10% in Q1 despite the coronavirus scare. That contrasts with Alibaba, which as noted is anticipating a fall in revenue.
JD.com is outperforming largely to its having a strong own-brand logistics team. This has enabled the company to keep up deliveries during the coronavirus outbreak, one of the few e-commerce platforms able to keep pace. Grocery orders have been particularly strong for its supermarket chain 7Fresh, with sales of vegetables, rice and eggs up 300% compared with the same time last year. JD.com has also been rolling out no-touch "contactless delivery," with some meals delivered with the temperature readings of the workers who prepared and delivered the food inside the box.
NetEase ( (NTES) )
NetEase NTES has also been a big winner with its videogames during the coronavirus epidemic. Its game Onmyoji, in which players combat demons, saw game time soar 80% over Lunar New Year. Use of best-seller Fantasy Westward Journey, based on the Chinese classic tale Journey to the West, climbed 45%. Its music-streaming service NetEase Cloud Music is leading growth in daily users in that category. And NetEase News service is, like every news provider in China, seeing massive growth in eyeballs. Time spent on the NetEase News app is up 44% while its target customers are shut away and desperate to hear the latest on the outbreak.
NetEase has generated a 5% increase in profits year to date, compared with 2019, the best performance among the defensive stocks. It also has particularly high levels of cash on hand, equivalent to 67% of assets.
Xiaomi ( (XIACF) )
The "Apple of China," Xiaomi is known for sleek phone models. It's likely to have a handset hit on its hands with the Black Shark 3, a 5G-ready phone designed with gamers in mind. Besides the cool name, the Black Shark 3 costs $545, making it cheaper than rival models from Asus and Naver.
Although the China tech publication Abacus faults the predecessor Black Shark 2 for "noticeably less smooth" animation than the Asus ROG Phone II, it's a lot cheaper. The Black Shark 3 will have a premium Pro model for $675 for gamers who must have the absolute best. Xiaomi's lower price point for most of its models should see it make strong early headway among Asia's middle classes as they make the move to 5G.