What happened
Chinese stocks lost ground in Tuesday's trading, and Bilibili(NASDAQ: BILI), Huya(NYSE: HUYA), and RLX Technology(NYSE: RLX) were among the names caught in the pullback. The companies' share prices closed out the daily trading session down 8.5%, 6.7%, and 7.2%, respectively, according to data from S&P Global Market Intelligence.
As part of an effort to bolster the country's economic recovery, the People's Bank of China announced today that it would be cutting lending rates. Unfortunately, the rate cut came in lower than the market anticipated and triggered broad sell-offs for Chinese stocks.
So what
While there wasn't any negative business-specific news for Bilibili, Huya, or RLX today, it looks like the macroeconomic backdrop in China isn't shaping up the way that investors had hoped.
Analysts had been expecting that China's central banking authority would institute a bigger cut on the five-year lending rate that serves as the benchmark for mortgages. The People's Bank cut the rate from 4.3% to 4.2%, while investors had been targeting a cut to 4.15%.
China has faced some powerful headwinds as it has emerged from pandemic-related challenges. With the lower-than-expected cut, many investors are concerned that recovery for the country's economy will be slower than previously anticipated.
Investors and analysts are worried that some weakness in the country's real estate market could have negative ripple effects across other areas of the economy. The market had been expecting that China would pursue more-aggressive initiatives to stimulate its economy, but it looks like that kind of help might not be coming -- at least not yet.
While U.S. stocks have generally enjoyed some strong rebound momentum across this year's trading, the Chinese market hasn't seen the same uptick in bullish sentiment.
The S&P 500 and the Nasdaq Composite are up 14.4% and 30.5% year to date, respectively. Meanwhile, China's benchmark CSI 300 index is down 2.4%. Outside of strong performance for some leading tech companies, many Chinese stocks have struggled to hold on to gains in 2023.
As shown in the chart above, both Bilibili and RLX have seen substantial double-digit sell-offs year to date. Meanwhile, today's valuation crunch has pushed Huya back into negative territory across 2023's trading.
Now what
Compared to U.S. stocks, many Chinese equities are currently trading at valuation metrics that look relatively cheap. On the other hand, China's stock market generally continues to be more volatile than the U.S. market.
If you're looking for an entry point into Chinese stocks on the heels of recent sell-offs, it's important to evaluate each potential company on a case-by-case basis.
Top Chinese e-commerce and software companies including Alibaba and JD.com have been serving up strong results lately, but many companies in the country's tech and consumer goods sectors have continued to post soft business performance this year. While Bilibili, Huya, and RLX look cheaper on the heels of recent pullbacks., each company is facing some significant challenges right now -- and each stock has an above-average risk profile.
RLX has a solid position in China's e-cigarette market, but the company's performance and growth outlook have been disrupted by regulatory changes in the country. New excise taxes and bans on flavored vape products caused large year-over-year declines for the company's sales and earnings in the first quarter, and it will likely take years for its performance to bounce back to pre-regulation levels.
Meanwhile, Huya has been able to shift into profitability through cost-cutting, but its sales have fallen dramatically. Like RLX, the game-streaming company has been hurt by regulations put in place by the Chinese government. Constraints on what games can be released and streamed in the country have squeezed Huya's sales potential. These same regulations have also hurt Bilibili, albeit to a lesser extent.
While Bilibili's gaming and game-streaming businesses have faced pressures from regulations, its digital advertising businesses have continued to serve up strong results. Compared to Huya, Bilibili's business is diversified across more verticals and looks stronger overall.
Among these three stocks, I think that Bilibili looks like the best buy right now. The company has managed to continue growing its user base, and its business has proved relatively sturdy despite macroeconomic and regulatory challenges. Down roughly 90% from its high, the stock deserves a look from risk-tolerant investors.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends Alibaba Group and Bilibili. The Motley Fool has a disclosure policy.
