3 Chinese Tech Stocks to Buy Before They Take Back Off

The three Chinese tech stocks profiled  in this column are well-positioned to  rebound during the rest of the year. In recent months, U.S. investors have been hesitant to include Chinese shares in their portfolios. That’s partly due to increased volatility as a result of country-specific political risks as well as the slowdown of global economic growth.

Over the past year, fierce regulatory crackdowns and strict Covid-19 lockdowns have led to dramatic downturns by many Chinese equities. A number of prominent Chinese tech stocks were not spared from this trend. Since the beginning of 2022, the Shenzhen Composite index and the Shanghai Composite index have fallen around 21% and 14%, respectively.

Meanwhile, the country’s National Bureau of Statistics announced that China’s GDP grew 2.5% year-over-year in the first half of 2022. On the regulatory front, Vice-Premier Liu He recently pledged his support for China’s technology sector. Consequently, a large number of analysts remain bullish on the country’s economic prospects for the rest of the year.

Against this backdrop, I have selected three Chinese tech stocks to buy before they take off.

Baidu (BIDU)

With market share of over 65%, Baidu (NASDAQ:BIDU) operates the largest online search engine in China, generating significant marketing revenue. It also has the fourth-largest cloud infrastructure platform in China. Alibaba (NYSE:BABA) is the leader of the latter sector.

The search giant released mixed Q2 results on Aug. 30. Although  its total revenue fell 5% year-over-year to $4.43 billion, the AI Cloud division’s revenue jumped by double-digit-percentage levels.

Analysts point out that the sluggish growth of China’s economy remains a significant, negative catalyst for the country’s advertising sector. Therefore, in an effort to further exploit a faster growing business, the company has expanded its AI Cloud business. AI Cloud remains a critical initiative for Baidu.

Meanwhile, Baidu has announced plans to sell its controlling stake in its struggling streaming business, iQiyi (NASDAQ:IQ), for $7 billion. This transaction will likely significantly boost its bottom line.

So far in 2022, BIDU stock has fallen more than 15%. As a result, the stock trades at historically cheap levels of 13.5 times its forward earnings and 2.5 times its sales. Analysts’ 12-month median price target for Baidu stock stands at $193.52.

Global X MSCI China Information Technology ETF (CHIK)

Global X MSCI China Information Technology ETF (NYSEARCA:CHIK) may appeal to investors who want to buy a basket of Chinese tech stocks as opposed to picking individual Chinese shares. CHIK  offers targeted exposure to large- and mid-cap Chinese companies in the information technology  sector. The fund debuted in America in December 2018.

China’s software and IT service sector grew at a stable rate through the first half of this year, with the revenue of the firm’s software businesses climbing roughly 11% YOY.

CHIK tracks the MSCI China Information Technology 10/50 Index and has 99 holdings. The fund’s top ten stocks account for almost 47% of its net assets.

In terms of sectors,  20% of the fund’s holdings are in the semiconductor sector, 18% develop electronic components, and 16% are in the telecommunications-equipment sector.

The ETF’s top holdings include the smartphone manufacturer Xiaomi (OTCMKTS:XIACF), optical lenses manufacturer Sunny Optical Technology (OTCMKTS:SNPTF), solar glass maker Xinyi Solar (OTCMKTS:XYIGF), Lenovo (OTCMKTS:LNVGY), and enterprise resource planning specialist Kingdee International Software (OTCMKTS:KGDEY).

CHIK is trading near its 52-week low and has lost 40% so far in 2022. The fund’s trailing price-earnings (P/E) and price–book (P/B) ratios stand at 14.26 times and 2.05 times, respectively.

NetEase (NTES)

Chinese technology heavyweight NetEase (NASDAQ:NTES) generated 72% of its revenues from its online gaming business in 2021. The company is dual-listed on the NASDAQ and the Hong Kong Stock Exchange. Tencent (OTCMKTS:TCEHY) and NetEase currently dominate the Chinese online-and-mobile gaming sector.

NetEase announced its Q2 financial results on Aug. 18. NTES’s Q2 revenue jumped 13% YOY to $3.5 billion, thanks to the growth of the company’s games unit and its related value-added services segment. The owners of NTES stock have been pleased that its gaming unit has been resilient during the economic slowdown.

Meanwhile, in late July, the company launched Diablo Immortal, a mobile game, in China. Analysts expect the game to boost NetEase’s bottom line in the coming quarters.

Chinese regulators recently approved a healthcare-education game made by NTES. That was the first NetEase game approved by Beijing since the government began cracking down on tech firms over a year ago. The data on the stock’s options suggests that the shares may rebound soon.

NTES stock is down almost 18% in 2022. Its dividend yield currently stands at 1.6%.

Finally, the shares are valued at 16 times the company’s forward earnings and 4.1 times its trailing sales. Wall Street’s 12-month median price forecast for NetEase is $120.82.

On the date of publication, Tezcan Gecgil, Ph.D., did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.