Stock Analysis & Ideas

China’s Inflation Defies Global Trends. What Does it Mean for Chinese Stocks?

Story Highlights

China’s inflation is at much lower levels than other major economies due to a slowdown in demand, triggered by the COVID-19 resurgence and the resultant lockdowns. While Chinese companies are supposed to benefit from the relatively low inflation levels, they remain under pressure for other reasons.

Major economies across the globe are under pressure due to sky-high inflation. In the U.S., July inflation slowed down to 8.5% from a 40-year high of 9.1% seen in June, mainly due to lower fuel prices. However, U.S. inflation still remains high, and the Federal Reserve is expected to continue to implement aggressive rate hikes to tame inflation. Meanwhile, China’s consumer price index (CPI) increased 2.7% year-over-year in July, compared to the 2.5% rise reported for June. The rise in China’s July CPI was the highest since July 2020 and was mainly due to higher food prices (specifically pork prices). However, it is worth noting that China’s inflation levels are still far below the levels seen in the U.S., Europe, and several other economies. While Chinese companies like Alibaba (NYSE:BABA) and Li Auto (NASDAQ:LI) might gain from comparatively lower inflation levels, their businesses are under pressure due to other risk factors.

Why is China’s Inflation Lower than Other Economies?

Excluding food and energy prices, China’s core CPI rose 0.8% year-over-year in July, which was lower than the 1% increase recorded in June. Overall, inflation levels in China, the world’s second-largest economy after the U.S., have been relatively much lower than in other major economies. This is because the country’s zero COVID policy led to lockdowns and impacted consumer demand. Moreover, a slump in China’s real estate sector also hurt the demand for energy and commodities.  

As per a Bloomberg report in early August, Bruce Pang, head of research and chief economist at Jones Lang LaSalle Inc., stated that China’s inflation rate “will likely rise past 3% in the next two months, due to a low base and the lift from pork prices.” That said, Pang expects core inflation to remain “benign” due to weak domestic demand. “This won’t cause much restriction to the monetary policy,” added Pang.

Overall, the economic downturn in China is keeping its inflation low and also helping to limit global inflation.    

Are Chinese Companies Benefiting from Subdued Inflation Levels?

While Chinese companies are gaining from comparatively benign inflation more than their U.S. counterparts, they continue to be under pressure due to country-specific factors like COVID-19 restrictions. Lockdowns led to major production and supply chain disruptions for manufacturers. Moreover, the COVID-19 resurgence also impacted consumer demand, thus hurting companies in many sectors. Furthermore, Chinese factories are suffering due to power shortages caused by one of the worst heatwaves the country has ever seen, accompanied by drought.

Let us look at the recent results of the following companies to get a better understanding of the situation in China.

Alibaba’s June Quarter Results Reflect the Impact of Lockdowns

While weak consumer spending trends and supply chain troubles amid COVID-19 restrictions impacted Alibaba’s e-commerce revenue, the company was able to beat analysts’ expectations for the June quarter (first quarter of Fiscal 2023).  

The e-commerce giant’s revenue in the June quarter remained flat on a year-over-year basis at $30.7 billion, as a 1% decline in the company’s China commerce segment revenue was offset by a 10% rise in the revenue from the Cloud segment. Meanwhile, adjusted earnings per ADS (American Depositary Share) declined 29% to $1.75.

What Are Analysts Saying About Alibaba Stock?

Baird analyst Colin Sebastian increased the price target for Alibaba stock to $140 from $134, and maintained a Buy rating. While the analyst feels that it is “too early to give the ‘all-clear’ signal,” he contends that the company’s performance in the June quarter suggests improving trends.

Sebastian noted that Alibaba is now focused on expanding its overall wallet share rather than just building the size of its customer base. Sebastian feels that this approach could enhance the company’s operating efficiency and margins over time.

Overall, Alibaba stock scores a Strong Buy consensus rating based on 17 Buys and one Sell. The average BABA price target of $156.12 implies 70.1% upside potential. Alibaba shares have declined this year due to China’s crackdown on tech stocks, geopolitical concerns, the impact of lockdowns, and delisting concerns.  

Li Auto (LI) Stock

Chinese electric vehicle maker Li Auto’s recently reported August delivery numbers disappointed investors. The company delivered 4,571 vehicles in August, down nearly 52% year-over-year and 56% compared to July.

Demand for Li Auto’s newly launched Li L9 SUV and the upcoming Li L8 model adversely impacted the demand for the company’s flagship Li ONE vehicles. However, on a year-to-date basis, deliveries increased about 57% to 75,396 units.

Last month, Li Auto reported Q2 results that missed analysts’ expectations. COVID-related disruptions and continued growth investments impacted the company’s profitability.

Is Li Auto a Good Stock to Buy?

Prior to the announcement of Li Auto’s August deliveries, Morgan Stanley analyst Tim Hsiao revealed that Li Auto announced on its mobile app that there would be a delay in the August deliveries of its L9 SUVs to August 30-September 4. The delay was caused by power shortages in Sichuan and a “production hiccup” in the company’s range extension system.

Hsiao feels that the actual effect of the delay could be marginal as the company is still at an early stage of L9 ramp-up. The analyst also added that the delay will further boost L9’s September sales. Hsiao continues to be bullish on Li Auto and reiterated a Buy rating with a price target of $53.

All in all, the Street is highly bullish on Li Auto stock, with a Strong Buy consensus rating based on nine unanimous Buys. At $68.89, the average Li Auto price target implies 159.2% upside potential from current levels.

Conclusion

Despite lower inflation than other major economies, Chinese companies might continue to be under pressure due to weak demand amid the country’s stringent COVID-19 policy and persistent supply chain woes. While Alibaba is facing sluggish demand in its core e-commerce business, Li Auto’s ability to meet the strong demand for its newly launched EV model is being impacted by supply chain troubles and power shortages.

Meanwhile, Wall Street continues to be highly bullish about the long-term prospects of these two Chinese companies.

Disclosure

Tired of arriving late to the Big Returns Party?​
Most investors don’t have major gainers like TSLA or NVDA on their radar from the start.
The profusion of opinions on social media and financial blogs makes it impossible to distinguish between real growth potential and pure hype.
​​For the past decade, we have developed and perfected technology designed to help private investors, just like you, find the best opportunities, with the greatest upside potential, in any financial climate.​
Learn More
Videos