Tuesday is shaping up to be a be a good day to own Chinese tech stocks, as rumors continue to mount that Chinese President Xi Jinping's government is about to step into the stock market in a big (and good) way, to help reverse a slide in investor sentiment that has cost the Shanghai Composite Index about 18% over the last nine months.
Shares of popular Chinese internet search giant Baidu(NASDAQ: BIDU) are up 3.8% through 11:45 a.m. ET, while Chinese electric vehicle (EV) companies Nio(NYSE: NIO) and XPeng(NYSE: XPEV) are up an even more optimistic 8.5% and 10.5%, respectively.
Chinese stocks "leap" in the leap year
It's not even just these three stocks that are performing well today, either. "Battered Chinese stocks leapt to their largest one-day gain in two years," reported Reuters earlier this morning. President Xi is planning to have a sit-down with state securities regulators to talk about means of curbing short-selling of Chinese shares. At the same time, China's so-called "national team" of largely state-controlled investment funds is said to be planning to buy more shares of Chinese companies in an effort to prop up stock prices.
And this makes sense. In the recently published book China's World View, Tsinghua University economics professor David Daokui Li (director of China's Academic Center for Chinese Economic Practice and Thinking) explains that China's government views itself as "all-responsible" for not just the health of its economy in general, but also for the personal finances of its citizens, acting in loco parentis even to the extent that it will intervene in the economy to protect investors from their own mistakes. As a result, whenever the government "feels a large number of households or citizens might be wounded" by an economic development -- such as a slumping stock market -- the government feels not just entitled, but compelled to intervene.
So while here in America we might wonder whether there will be government intervention to fix a bear market, it appears that the Chinese interpretation of what's happening today is much clearer cut: If the stock market is down, the government will certainly intervene.
What does this mean for Baidu, Nio, and XPeng stocks?
This helps to explain the very strong reaction to even just rumors that President Xi is concerned about weakness in China's stock market. Intervention there is being taken as a sure thing -- and therefore, it's a sure thing that stocks will be going up, at least in the short term.
Reuters cautions that "economic fundamentals remain unchanged" in China, where consumer confidence is down, exports are down, and corporate and local government debt levels are up. None of that is good for stock prices in the long term, but in the short term, buying pressure from state-owned enterprises could force stock prices up.
Longer-term, it's still fundamentals that matter, and from that perspective, I have to say I'm not overly optimistic about either XPeng's or Nio's chances. At both of these electric car companies, sales have begun rising again after a slump in the first half of 2023. But at both companies, losses continue to rise as well. (It almost seems that the more EVs these companies sell, the more money they lose!)
In contrast, Baidu -- whose sales are also inching higher -- remains solidly profitable with $3.1 billion in trailing earnings and $3.4 billion in trailing free cash flow. At a market capitalization of only $36.2 billion, and with a rock-solid balance sheet boasting $14.5 billion in net cash, this stock already sells for an enterprise-value-to-free-cash-flow ratio of only 6.4, and with a growth rate projected at 32.5% annually over the next five years -- before counting the effects of any government stimulus to the economy!
Of the three stocks to invest in, the choice here is really easy. Baidu stock is screamingly cheap. Nio and XPeng are not.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu and Nio. The Motley Fool has a disclosure policy.
