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Why Alibaba, Baidu, and Other Chinese Stocks Rallied on Wednesday

Motley Fool - Wed Nov 30, 2022

What happened

Some of the most popular Chinese stocks continue to rally on Wednesday as government officials announced steps that could lead to a lifting of pandemic-related restrictions that have not only stifled growth, but sparked widespread unrest in China.

With that as a backdrop, shares of e-commerce platform and search giant Baidu(NASDAQ: BIDU) soared as much as 9.4%, Alibaba Group(NYSE: BABA) climbed as much as 11.1%, and streaming video platform Bilibili(NASDAQ: BILI) surged as much as 15.2%. As of 11:32 a.m. ET, the trio were still trading higher, up 6.4%, 9.5%, and 8.6%, respectively.

While there was some company-specific news, it appears the broader economic and regulatory developments ultimately drove the stocks higher.

Person entering credit card info into a smartphone with a package sitting nearby.

Image source: Getty Images.

So what

Today marked the second day of gains after Chinese officials responded to widespread demonstrations in China to protest lockdowns resulting from the government's zero-COVID policy.

In a press conference on Tuesday, government health authorities announced steps to increase the vaccination rate among China's elderly population. Officials revealed that roughly 66% of citizens over the age of 80 have now received booster shots, up from 40% as of Nov. 11.

Having a greater percentage of the most vulnerable population fully vaccinated is seen as an important step to fully reopening China's beleaguered economy.

Widespread protests had erupted in China over the weekend, as some localities had levied tighter restrictions in response to rising infection rates. This was in stark contrast to reports from earlier this month that suggested the country was moving toward a broader opening of the economy and an easing of restrictions.

Some market watchers predict the Chinese government could unwind the far-reaching restrictions as early as March, though the reality is likely fluid and will depend on how well the pandemic is being contained.

Now what

There were also a couple of company-specific factors that helped fuel the gains. After the company reported better-than-expected results yesterday, Bilibili's stock was on the receiving end of two price target increases and positive commentary from Wall Street.

Citi analyst Brian Gong raised his price target on Bilibili to $15.50 from $12, while maintaining a neutral (hold) rating on the shares. At the same time, Barclays analyst Jiong Shao raised his price target on the stock to $16 from $13, while keeping an equal weight (hold) rating on the shares. Bilibili stock is currently trading above each of those price targets, so these were reactive moves in response to the stock's 24% surge yesterday, driven by the company's positive earnings results. The analysts cited Bilibili's focus on engagement and improved margins as fueling their more bullish views.

For its part, Baidu announced progress in its self-driving car technology, saying it will debut its Level 2 driver-assistance platform -- ANP 3.0 -- next summer.

From a broader perspective, even the potential for improvements to the Chinese economy has been enough to spark a rally for these companies, even though things are far from settled and uncertainty remains.

However, if the situation does improve, it will likely boost China's consumer spending, which will ultimately fuel spending on e-commerce platforms including Alibaba, increase advertising on Baidu's online search platform, and boost streaming video providers including Bilibili.

Furthermore, these stocks are selling at or near their cheapest valuations ever, with Bilibili, Baidu, and Alibaba selling for 1.8, 2, and 2 times sales, squarely within the parameters of a reasonable price-to-sales ratio, which is between 1 and 2.

The potential for China to fully reopen its economy is certainly appealing, as are valuations in bargain basement territory. That said, China has its own set of inherent risks investors should consider, while keeping these stocks as a cautiously sized part of a balanced portfolio.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions in Baidu. The Motley Fool has positions in and recommends Baidu. The Motley Fool recommends Barclays Plc and Bilibili. The Motley Fool has a disclosure policy.

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