3 Monster Stocks in the Making

For investors willing to take on above-average risk in pursuit of huge returns, the Chinese tech sector can make for a great starting point. It offers a backdrop of rapid national economic development in addition to many of the same growth-enabling characteristics and scenarios that have helped leading American tech companies deliver stellar returns in recent decades.

Businesses that can seize on China’s broader economic trends while also taking advantage of and contributing to tech industry tailwinds are positioned for tremendous growth. In that mold, I think that Baozun (NASDAQ: BZUN), iQiyi (NASDAQ: IQ), and Bitauto Holdings (NYSE: BITA) are stocks that could deliver monster returns for long-term shareholders.

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1. Baozun

Baozun offers online sales platforms as a service in China and is an e-commerce player that I think is on track to be a long-term winner. The company helps major Western brands like Nike, Microsoft, and Calvin Klein maintain online stores on leading Chinese e-commerce platforms like Alibaba and JD.com and navigate key hurdles to thriving in the country’s e-commerce market. That’s a service that’s on track to become increasingly valuable.

China’s e-commerce sales volume reached $1.1 trillion last year, topping the $800 billion in sales notched by America’s online retail market, and it’s not even close to peaking. E-commerce spending is still expanding rapidly, with last year’s total up roughly 32% year over year and a report from Goldman Sachs estimating that gross volume for the country’s online retail industry will climb to $1.7 trillion in 2020. There’s room for massive growth beyond that point as well, with current trends suggesting the Chinese middle class will continue to expand and the average urban household will see big increases in purchasing power.

Baozun’s business is also on track to become more dependable and profitable. The company is moving away from warehousing and shipping merchandise and toward a model that sees it generating sales from the more profitable business of connecting consumers with brand partners. That’s a pivot that’s likely to reduce risk and improve margins, and it looks like the company will continue to be able to drive sales growth as it increases its client count. In addition to expansion potential with major brand partners, Baozun is working on tailoring its platform for small businesses — a move that could open up big new avenues for expansion.

Growth for online retail is a trend that’s poised to continue over the long term, and I think that Baozun in particular offers big potential for adventurous investors. Valued at roughly 4.3 times forward sales and 52 times this year’s expected earnings, the stock still offers big upside when placed in the context of the underlying business’ long runway for growth.

2. iQiyi

iQiyi has frequently been referred to as “the Netflix of China,” but if you had to make a comparison, its business model is closer to Hulu’s. The Chinese company produces original content and distributes multimedia content from other producers, but it currently generates more sales from its free, ad-supported service than it does from paying viewers. That dynamic will likely shift over time, and investors still have an opportunity to get in early on what could be an incredible growth story.

In March, iQiyi had its initial public offering after being spun off from Chinese search giant Baidu, and the company already counts more than 420 million users across its platform, with roughly 60 million having paid subscriptions and the rest on an ad-supported model. With more people viewing content on iQiyi’s platform than are currently living in the U.S., there might be concerns about how much room is still left for growth, but the outlook on that front is actually pretty promising.

Roughly 40% of China’s population has yet to connect to the internet, meaning there’s room for growth as that mass of people comes online and people are becoming wealthier, which bodes well for the growth of the country’s entertainment industry. iQiyi has added more than 10 million paying members since the start of the year, and a wealthier Chinese population should help the company continue to expand its paying user base.

iQiyi currently enjoys and is building an embedded position in the Chinese tech and content space. The company’s relationship with Baidu opens up data and marketing advantages. It has a deal with Netflix to distribute some of the American streaming giant’s original content, and has indicated more is on the way. And it recently announced strong early results for its cross-platform membership drive with e-commerce company JD.com.

After climbing roughly 60% from its IPO price, iQiyi is valued at $20.5 billion — or 7.6 times trailing sales. With the company posting 57% year-over-year sales growth in its March-ended quarter and guiding for growth between 42% and 49% in the current period, putting the company at 40% revenue growth on the year seems a conservative estimate and would place its forward price-to-sales ratio at about 5.3 — not prohibitive in light of how much room for growth remains. Profitability isn’t there yet, but as the company scales and continues to boost its paid-user count, iQiyi has multibagger potential.

3. Bitauto Holdings

Bitauto provides a leading e-commerce platform for automobile advertising, buying and selling, and financing in the Chinese market. The company is valued at roughly 16.5 times this year’s expected earnings, and its $1.7 billion market capitalization is closely in line with the business’s expected sales this year. These valuation metrics along with the company’s competitive position and tailwinds in its industry suggest that Bitauto stock presents an attractive combination of value and growth potential at current prices.

Shares are down more than 20% year to date due in part to management’s sales projection for the current quarter coming up short of analyst projections. The company posted 54% year-over-year sales growth in its last reported quarter, and expects sales growth between 37.8% and 41.3% in the current quarter. That’s clearly evidence of some slowdown, but it’s still healthy growth and far removed from being a death knell.

Between 2009 and 2030, China is projected to have added 850 million people to its middle class. With general e-commerce trends guiding sales, advertising, and financing into the online realm, that creates a favorable macroeconomic backdrop for Bitauto’s business. Overall Chinese auto industry growth has slowed, but there would still be room for Bitauto to expand even if there were no growth in commercial vehicle sales.

The company’s three core segments have all seen growth lately, but expansion for its auto financing business looks to be the biggest performance driver in the near term. Much of the transactions services business is actually handled by Bitauto’s Yixin subsidiary, which operates a platform for online auto financing and was spun off in 2014 and had its initial public offering last year. Yixin trades as its own security on the Hong Kong market, but Bitauto retains a 47% ownership stake, and the unit looks to play a big part of its parent company’s future. Bitauto’s transaction services revenue increased 115% year over year in the company’s January-ended quarter and now account for the largest share of sales.

With a business that’s already solidly profitable and still has avenues to growth, Bitauto is a company that has potential to deliver a great return on investment — particularly in light of recent sell-offs.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Keith Noonan owns shares of Baozun and iQiyi. The Motley Fool owns shares of and recommends Baidu, JD.com, Netflix, and Nike. The Motley Fool owns shares of Baozun. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

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