Five Spicy Stocks For China’s Reopening

If you’re looking for a way to profit from the long-awaited Chinese reopening – something that goes beyond the usual Chinese stock suspects (looking at you, Alibaba and Tencent) – I’ve got five you might consider. They’re all really close to home. And one of them has climbed 13% in just the past few days, after an out-of-the-park earnings update.

1. Las Vegas Sands

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Forget the name: ever since the $6.3 billion sale of its US properties in 2021, LVS has had no real footprint in the US. Instead, the firm owns the Marina Bay Sands in Singapore and – through its 69% stake in Hong Kong-listed Sands China – five integrated resorts in Macao. Unlike in Vegas, where casual gamblers go to party first and to try their luck at the tables second, in these places, gaming makes up the vast majority of total revenues. And in China – where luck is integral to the culture – gambling is big business.

But Covid decimated tourism everywhere, and LVS’s super casinos essentially closed for two years. In 2018, LVS raked in over $5 billion in earnings before interest taxes, depreciation, and amortization (EBITDA), but in 2022 that had dwindled to just $260 million. Now, with restrictions all but scrapped, LVS has started out on a long road to recovery. Longer term, the company is in a position to hit it big as one of only a handful of firms that are allowed to operate mega casinos and integrated resorts in Macao, which the Chinese government sees as a key pillar of its tourism ambitions.

Mind you, LVS shares have nearly doubled since last summer in anticipation of China’s reopening, so any stumble now could deal them a bad hand. And the sheer amount of debt the firm accumulated to survive the past couple of years is worrying. Building casinos is an immensely expensive business, and while that alone serves as a genuine competitive advantage, gaming is a deeply cyclical business, and nasty surprises like the one we’ve just been through can rattle investors, as profit plummets but debt doesn’t. It means LVS is not for the faint of heart.

2. YumChina

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YumChina fled the Yum! Brands nest in 2016 and now holds the exclusive rights to operate the KFC, Pizza Hut, and Taco Bell chains in China. And it’s huge: it’s the biggest restaurant company in the country, with more than 12,000 locations (compared to McDonald’s 3,500). Unlike its US namesake, which employs franchisees to operate its chains, YumChina owns and operates all its stores. That means the firm gets to keep all the finger-licking profit when sales are booming – not just a “franchise fee” (percentage of the sales). What’s more, thanks to digital and delivery investments, YumChina actually grew sales and profit throughout the on-again, off-again Covid lockdowns, proving the strength of the business and the popularity of its food. And while that might limit the upside from a pure reopening perspective, it’s comforting if you’re thinking about the company as a near and long-term play on growth in China.

Unsurprisingly, YumChina’s stock has rocketed this year and the shares aren’t exactly being given away at a 32x price-to-earnings (P/E) ratio. And that’s a risk, especially if the country’s reopening hits any snags or if some new controversy batters the company. Food supply chain contamination and anti-Western sentiment have rocked its stock price before.

3. Estée Lauder

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Estée’s one of the belles of the prestige beauty market, with products that have enjoyed growth as premium as their price tags for a long time. China is a gem in the firm’s crown, making up about a third of sales and even more of its profit, given the country’s higher-margin profile. What’s more, travel retail (think: airports and tourist-heavy shopping districts like New York’s Fifth Avenue) accounts for roughly another third of its total business. And when it comes to tourism spending, affluent Chinese travelers punch well above their weight. All in, then, a Chinese recovery should have sales growth looking its best. What’s more, Estée gave its online offerings a serious makeover – you can now get online consultations, for example – to help it through lockdown-driven department store closures. And it’ll continue to benefit from that.

In terms of risks, a recession in the US or Europe would dampen demand for Estée’s pricey nice-to-haves. And right now, the stock’s valuation is eye-wateringly expensive, changing hands at 42x P/E. That means a lot of success is already being baked into the share price. Still, at least for now, momentum appears to be on Estée’s side.

4. Nike

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China’s important to Nike for two reasons. Firstly, the country makes up around 15% of total sales and was growing rapidly before Covid struck. That meant China was becoming a bigger slice of the Nike pie and pulling up the firm's total sales growth along the way. Now, China sales have stagnated over the past couple of years, but they’ve just started picking up the pace – growing 6% after adjusting for currency moves during Nike’s most recent quarter.

Secondly, more than a third of Nike’s merchandise is made in China, and lockdown-related supply disruptions have played havoc with the company’s inventory. That has meant higher costs for Nike at a time when booming online sales – which are substantially more profitable than in-person ones – should have lit up profit margins. In theory, then, a smoothly operating supply chain and beefed-up online sales should have Nike hitting a new, more profitable stride.

The risks, though, are the mirror image of the opportunities. Any new supply disruption would shackle profit margins and sales growth – and with its stock valuation at an expensive 34x P/E, that’s something that could knock Nike off its stylishly dressed feet. There’s also the risk that a recession in the US or Europe could hold back demand for Nike’s gear. Fans of the stock will tell you that those things are only likely to be temporary, though, and if Nike can weather the past couple of years, it can weather anything.

5. AOSmith

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AOSmith sells water heaters and water treatment devices (the under-the-kitchen-sink filter type) for homes and businesses. The US is AOSmith’s home market, but China was driving more than 35% of total sales by 2016. However, the Chinese economy started to slow in 2019 as Chinese-US trade tensions escalated, and AOSmith got caught with too much inventory. And then Covid came along, and the firm’s Chinese revenues fell a bit further into the drain – they’re now just 20% of the total and still falling. AOSmith’s share price has moved up recently, after dropping to an all-time-low valuation in September: just 13x P/E. Investors, it seems, might have all but written off AOSmith’s Chinese future.

But therein lies the opportunity: should demand in China improve, investors might start to eye its Chinese fortunes more favorably, and that could lift the stock’s valuation. Elsewhere, there’s recession risk. When it comes to the firm’s US sales, investors are nervously keeping tabs on the housing market slowdown – fewer new homes mean weaker demand for water appliances. But the fact that almost 90% of water heaters are bought to replace broken ones should cushion any blow – no one wants cold showers, after all. AOSmith issued fourth-quarter results on Tuesday and investors liked what they saw – including much better profit margins from China. And that sent the stock 14% higher.