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Why this Chinese Stock is Set to Outperform

information technology investing strategies Jul 14, 2021

Published on July 14, 2021

Key Points:

  • China is interfering with any major domestic company getting in their way
  • In response, Chinese stocks have gotten crushed this year
  • Therefore we created our own China Growth Portfolio to list the stocks that will avoid the major Chinese regulators! We break down one of them below:

 

Overview:

A little over 10 months ago, growth stocks were jumping in price every single day. While the pandemic dictated our physical lives, the market played by a different set of rules. This deviation from the world around it, led to Chinese growth stocks specifically, exploding in value far past their peers from April of 2020 all the way until October of last year. However since that high point, the narrative changed around their growth story.

 

What happened?

The Chinese government interfered with any domestic company that got in their way. Household names like Alibaba got slaughtered in the making, seeing their prices drop over 50% from their recent high's. And if you ask other Wall Street analysts, they'd tell you this is just the tip of the iceberg. That's why we decided yesterday to launch our own China Growth Portfolio and give you the stocks that are avoiding this regulation. Stocks that we believe, are ready to explode in value for the long term investor. As part of that strategy, there may be a lot of names you do not recognize and that design was done on purpose. On that list there's one name in particular we love, that we want to talk more about. Let's break it down:

One of Kingsoft's Data Centers

Enter Kingsoft:

For those of you who have never heard of Kingsoft (Ticker: KC), KC is a software company based out of Beijing. KC has two main business lines: Online games (which brought in $500M of revenue in 2020) and Office Software and Services (which brought in $337M of revenue in 2020). You may be wondering, "How is this company doing close to $1B in revenue and I've never heard of it?". That is not a fluke, it is by design!

KC has and continues to fly under the Chinese Government's radar. Due to this they're free to operate "somewhat" independently and grow their business successfully without interference. This has translated into revenue growth of 22.5% CAGR (Compound Annual Growth Rate). For a company of their size, this growth is unheard of. Better yet they're growing profits like crazy too! While in 2019 they lost $30oK, in 2020 they responded by making $1.5M And how is the market responding to this? By only assigning a value of $6.8B - making their 2020 historical multiple trading at only 8x! This multiple is extremely low and shows how undervalued their business truly is.

 

Stock Fluctuations:

You may be looking at the chart right now and seeing that the price has dropped from their recent highs. So, if the annual financials are great, why was there a drop? One of the key reasons is due to their missed sales numbers in Q4 of 2020. KC also provided revenue guidance of 1.8B - 1.9B RMB which was slightly below the street's consensus. Overall, while the sales miss was negligible the sales guidance, combined with China macro fears lead to some serious selling off - which we believe was well oversold. Therefore this is setting us up nicely for a good rebound story as we believe the overreaction from the market should start to change direction soon.

 

Financials: ✔️ Technicals: ✔️ Outlook?

So the financials pan out, the technicals look promising, the only thing left to discuss is their outlook going forward. In a crowded space with other companies like Baidu, Alibaba, Amazon, Microsoft, etc. there sure are a lot of external pressures that they're facing.

However, by riding the wave of remote working, online collaboration for them has become the new core product strategy. As a beneficiary of this overall increase in demand due to an increasing remote workforce, the market penetration and customer loyalty of WPS+ cloud office services have significantly improved. Looking ahead, they are continuing to focus their efforts towards their office software and service business further strengthen their young footprint here. On their games business line front, they are continuing to maintain their solid development of their core games while bringing new game genres to further strengthen their development in the online games business. This should be a major point of growth for them going forward as well.

 

Conclusion:

Kingsoft's stock is setting itself up for a nice rebound. An IPO that recently turned south given their Q4 sales miss, Kingsoft is setting itself up to become the AWS of China. Given AWS consists of over 50% of Amazon's operating income (yes this is hard to believe, but is true), this is a business we want to be a part of in the long term. We therefore are initiating an overweight rating and assigning a price target that we believe is achievable over the foreseeable future! No one in the world can't predict the rock bottom, but we believe it is near and that significant upside is in the near future.

 


 

Rating: Overweight

Price Target: $37.5 (25% upside from its current price of $30)

Target Date: 10 Months

Ticker: KC

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