Goldman Sachs Group Inc (GS)’s Top 3 Buys in China TCHEY,BABA,BIDU

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Though the economy in China has slowed down, no company or industry is ready to ignore the country. That is because of the size of the economy and the enormous scope to develop it further. The growth might have slowed to the lowest pace in two decades. However, there are areas where there are plenty of opportunities to grow. For instance, Internet and Internet companies have still tremendous scope to perform. Of course, the slowdown might play a role in their performance. But the key factor is the transformation towards online or ecommerce business. Still, selecting the companies is not an easy task to get better returns for the investment. Goldman Sachs Group Inc (NYSE:GS) has made the task much easier for investors who are focused on Internet companies from China. According to the brokerage, there at least three stocks from China that is worth looking at for investments.

Potential To Grow In Ecommerce

The most recent official data suggested that there are about 668 million Internet users in China at the end of the first half of the current year, which was 2.9% higher than the last year period. At the end of the year 2013, there were 632 million Internet users. However, the penetration level is less than 50% at 48.8% in the most recent data from China Internet Network Information Center (CINIC). The significant factor is that almost every Internet user was using a smartphone, which makes it convenient for the consumers to place orders from wherever. Goldman Sachs Group Inc (NYSE:GS) took the consumers choice as one of the reasons for picking the stocks.

According to CINIC, the proportion of those ready to use the smartphone for online purchases grew to 88.9% from 85.8% in the last year. As a result, those who are using the laptops or desktops with access to the Internet have slipped to 42.5% and 68.4% respectively. The usage of mobile for online services has also recorded growth in the first half of the current year. For instance, the mobile payment sector jumped 26.9% to 276 million. Similarly, mobile e-commerce grew 14.5% to 270 million users since the end of the last year. The data suggests how the companies involved in e-commerce will benefit. Let’s look the top three gainers.

Conviction Buy List

Goldman Sachs Group Inc (NYSE:GS) has shifted TENCENT HOLDINGS ADR (OTCMKTS:TCEHY) to its Conviction Buy list just before the stock was to be added to the MSCI. The company has cited its leadership in mobile and barriers to entry apart from the expected solid growth. The brokerage expects another 32% upside for the shares of Tencent Holdings. The investment advisor believes that it was the best-placed Internet Company in China. That was due to its dominant super app ‘WeChat’. The brokerage said that the company’s shares are valued at 28 times of their estimated earnings for the year 2017.

The optimism stems from certain positive factors from the third quarter results of TENCENT HOLDINGS ADR (OTCMKTS:TCEHY). For instance, its revenue from online advertising more than doubled thus offsetting the slowdown witnessed in its PC gaming revenue. The Chinese firm indicated that it would continue to penetrate high revenue while focusing low daily average user smartphone game genres in respect of content. As far as its Gameplay, it is pioneering fresh smartphone game genres like MOBA games and shooting by using its experiences in creating new PC client game genres. TENCENT HOLDINGS ADR (OTCMKTS:TCEHY) is also establishing a platform for creating player communities for high DAU and Low-ARPU like playing board games and card within the social networks and outside.

Other Two Beneficiaries

The other two beneficiaries that Goldman Sachs Group Inc (NYSE:GS) has identified is Alibaba Group Holding Ltd (NYSE:BABA) and Baidu Inc (ADR) (NASDAQ:BIDU). The brokerage believes that the two stocks would gain from the inclusion in the MXCN. Therefore, the financial advisor preferred to retain its rating of Buy on the two company’s shares. Similarly, JD.Com Inc(ADR) (NASDAQ:JD) and Vipshop Holdings Ltd – ADR (NYSE:VIPS) are expected to gain from e-commerce growth in China. The investment advisor expects solid growth of NetEase Inc (ADR) (NASDAQ:NTES) on mobile gaming while Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) on travel consolidation. The financial firm also sees scope for margin expansion to drive the bottom line growth.

Alibaba Group Holding Ltd (NYSE:BABA) said during the third quarter results announcement that its annual active buyers advanced to 386 million while mobile monthly active users increased to 346 million. That indicated its ecosystem continued to prosper in extending its leadership position in mobile commerce. The Chinese e-commerce firm believes that its user engagement was healthy signifying more buyers purchasing in different categories. The company’s monetization has witnessed progress to 2.42% in the third quarter from 2.3% in the year-ago quarter. That demonstrated its focus on high-quality merchants, as well as, delivering the good value proposition to its merchants.

As far as Baidu Inc (ADR) (NASDAQ:BIDU) is concerned, the company expects 29.5 – 33.4% YOY growth in revenue in the fourth quarter. The company has exchanged Qunar shares With Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP). Therefore, its results for the fourth quarter will reflect only 26 days of Qunar. Baidu will also gain from mobile growth as its represents close to two-thirds of its search traffic. China is in a mobile age and there is scope to redefine the mobile experience and the company is also extending its reach of its platform to integrate and connect search, as well as, maps. The company sees momentum in transaction services providing enough confidence to continue investing.

Conclusion

Though Goldman Sachs Group Inc (NYSE:GS) has commented about the overall China-based Internet companies, it picked up three companies. TENCENT HOLDINGS ADR (OTCMKTS:TCEHY), Alibaba Group Holding Ltd (NYSE:BABA) and Baidu Inc (ADR) (NASDAQ:BIDU) are the three where investors can bank their investors for better returns. There is enough scope to boost the penetration level and that would provide further growth opportunities.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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