Chinese stocks have largely remained submerged in volatility over the last few years. Many notable names have not been spared. And investors will want to take note of any guidance Chinese companies offer on complying with the SEC’s Holding Foreign Companies Accountable Act (HFCAA).

With that being said, China is the second largest economy in the world and investors may be pondering if it’s time to add exposure to Chinese equities.

While there have been worries about consumer spending in China, middle-class growth has greatly accelerated over the last few decades. Despite the progress, China has plenty of room left to expand when it comes to internet users growth, which could benefit Chinese tech companies.

Last year, China stated it had reached over a billion internet users. Still, nearly 30% of the population are not internet users. It is also widely thought that the Chinese middle-class has grown to 500 million people, or more than the total U.S population.  

Let’s take a look at two Chinese tech stocks that can capitalize on this growth and dive into the value they offer investors at current levels.

Alibaba (BABA Quick QuoteBABA - Free Report)

Alibaba is a leading e-commerce giant in China and one of the most recognizable companies in the world. Alibaba’s three business segments Alibaba.com,Taobao, and Tmall, account for more than half of all online retail sales in China.

Despite such dominance in market share, BABA is trading 55% off its 52-week highs. Year to date, BABA is down -31% to underperform the S&P 500’s-21%. Alibaba’s peer group is down -61% as well.

Image Source: Zacks Investment Research

BABA has a forward P/E of 10.7X. Alibaba is trading at a discount to its industry’s average of 22.9X. BABA is also trading far below its high of 51.3X over the last five years and the median of 32.9X.

Alibaba currently trades at a more reasonable valuation than it has in the past. Wall Street was initially open to paying a premium for BABA after its IPO in 2014. The growth prospects for BABA have been very intriguing, with investors historically paying up for the stock.

A large part of BABA’s decline hinges on fears of Chinese stocks being delisted on U.S. stock exchanges. Because of its growth and nontertiary, Alibaba should be a company that is expected to comply with the SEC. Also, estimate revisions have largely trended up over the last 60 days.

Earnings are expected to be down 8% in 2022, but rise 9% in FY23 to reach $8.33 a share. Top line growth is expected to be up 2% this year and another 13% in fiscal 2023 to $154.64 billion. Alibaba also beat last quarter’s earnings expectations by 16% at $1.75 a share.

BABA currently lands a Zacks Rank #3 (Hold) and its Internet-Commerce Industry is in the bottom 37% of over 250 Zacks Industries. At current levels, longer term investors may want to hold on to BABA for its growth prospects.

BABA is expected to have 9% EPS growth over the next five years. Also, BABA has an overall “A” VGM score with the company standing to benefit from China’s highly profitable “singles day” in November. Plus, the average Zacks Price Target of $158.69 suggests 94% upside from current levels.

JD.com (JD Quick QuoteJD - Free Report)

JD is another e-commerce stock investors may want to consider for exposure to the internet and middle-class growth in China. JD currently lands a Zacks Rank #1 (Strong Buy) with earnings estimates on the rise.

JD operates as an online direct sales company in China. JD.com offers a variety of products including digital products, home appliances, automobile accessories, personal care items, apparel and luxury goods.

Year to date, JD is down -24% to slightly underperform the benchmark. However, over the last five years JD is up a respectable 30%. JD is trading 42% off its 52-week highs and the rising earnings revisions could start an upward trajectory for the stock again.

Image Source: Zacks Investment Research

JD.com reached its first fiscal profit in 2017 and its earnings started to confirm the company as an elite player in the e-commerce space in China. This led to a significant rise in the stock, as shown in the chart above.

Trading around $53 a share, JD has a forward P/E of 25.1X. This is close to the industry average of 22.9X. This is also well below the extreme high of 1,135.5X over the last five years and the median of 68.8X. Trading at a far more reasonable valuation, much of JD.com’s poor performance surrounds the fear of SEC sanctions. With that being said, JD’s earnings revisions have continued to go up.

According to Zacks estimates, 2022 earnings are expected to be up 27% at $2.15 a share. Fiscal Year 2023 calls for another 24% earnings growth. Also, top line growth shows the company is starting to fight the global effects of inflation. This year’s sales are expected to be up 6% and another 15% in FY23 to $182.36 billion. 

JD has an overall “A” VGM score and the average Zacks Price Target offers 63% upside from current levels. JD.com is also a beneficiary of China’s upcoming singles day with the company having a record $48.7 billion in sales during last year’s event.

Bottom Line

The upcoming singles day in China could be a catalyst for Chinese tech stocks. As a holiday celebrated by unmarried people in China to spoil themselves by shopping, retailers offer lucrative deals to generate more sales. Similar to Black Friday or Cyber Monday, Singles Day has become the largest online shopping day in the world. Alibaba and JD.com racked up a record $139 billion in sales during last year’s singles day. Despite delisting fears of Chinese stocks, both companies should be expected to comply with the SEC.

China’s massive growth of its middle-class and internet users are reasons for investors to consider these two tech giants. Despite the ill-effects of Covid-19, more of the Chinese population was able to familiarize themselves with e-commerce platforms during quarantine. 

The risk to reward is also becoming favorable for investors to capitalize on the long-term growth of Chinese tech stocks.