The collapse of Luckin Coffee earlier this year, many investors caused darkness skepticism about Chinese stocks. And the passage of a new House bill in May that could force Chinese companies to withdraw their shares if they do not comply with new regulations reinforces that pressure.
Faced with these issues, investors need to be more selective with Chinese stocks. Today I will highlight three Chinese stocks that investors should avoid: Secoo (NASDAQ: SECO), Cheetah Mobile (NYSE: CMCM), en iQiyi (NASDAQ: IQ).
Image Source: Getty Images.
1. Secoo
Luxury e-tailer Secoo went public at $ 13 in September 2016, but it now trades at less than $ 3 per share. In its IPO submission, Secoo claimed that it was “Asia’s largest online integrated upscale products and services platform” by GMV (gross merchandise volume), as the value of all goods sold in its marketplace.
That claim, which was based on a report by controversial research firm Frost & Sullivan, immediately raised red flags because Secoo generated a small amount of GMV compared to e-commerce giants Alibaba en JD.com.
Secoo’s submission also included an unexplained gap between its “registered” and “active” customers, indicating that it was running out of cash before its IPO. Those issues all persuade investors to stay away from the stock market.
Secoo’s revenue and net income rose 28% and 4%, respectively, in fiscal 2019. But in the first quarter of 2020, its revenue fell 14%, and it posted a net loss – even as Alibaba and JD continued to do so. generating double-digit growth in revenue and profit. Therefore, it makes no sense to invest in this shady e-commerce underdog as the market leaders grow at much faster rates.
2. Cheetah Mobile
Cheetah Mobile went public at $ 14 a share six years ago, but its stock now trades at about $ 2. Cheetah produces a wide range of mobile apps and games for Chinese and foreign users, including Cleaner, CM Browser, CM Locker, en Piano Tiles 2.
Image Source: Getty Images.
Cheetah initially impressed investors with its bilingual turnover and growth in earnings, but its share fell to Facebook en AlphabetGoogle has cut ties with Cheetah over advertising company allegations. Both companies claimed that Cheetah introduced background clicks on devices to claim credit and advertising revenue for app installations that did not originate from their own apps.
Facebook is blocking Cheetah from its advertising network, while Google is launching Cheetah from its advertising network and Play Store. That one-two punch caused Cheetah’s revenue and adjusted revenue to drop 28% and 71%, respectively. Analysts expect its revenue to tumble 35% again this year, resulting in a net loss.
To stay afloat, Cheetah fired its live-streaming video company and its stake in ByteDance to raise money and expand its new AI-related robotics business – but that unit remains useless. Cheetah’s apps are still available in China, but competition from Alibaba, Tencent, and other larger companies could put an end to its domestic problems.
3. iQiyi
Baidu (NASDAQ: BIDU) iQiyi, one of the top video streaming platforms in China, spun two years ago. iQiyi’s revenue rose 52% in 2018, but declined to 16% growth in 2019 and just 7% in the first half of 2020. Its net loss also expanded every year in all three periods.
IQiyi’s slowdown can be attributed to competition from Tencent Video, Alibaba’s Youku Tudou, and Bilibili, such as sluggish advertising spending in China. iQiyi expects the delay to continue with 0% -6% revenue growth in the third quarter.
Those weaknesses have already made iQiyi a wobbly investment, but prolific short-seller Muddy Waters – who correctly identified Luckin Coffee’s fraudulent practices before its stock crashed – also accused iQiyi of fraud earlier this year.
Muddy Waters and Wolfpack Research claimed that iQiyi inflated its revenue by 44% and its user numbers by as much as 60%. Last quarter, iQiyi revealed that those allegations had an SEC probe into their accounting practices.
iQiyi is still trading about a dollar above its IPO price, but it could quickly lose its footing if the SEC probe forces the company to recover its finances. That problem would likely decrease Baidu as well, which is heavily reliant on iQiyi’s revenue growth to offset its declining advertising revenue.
