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HomeUncategorized: U.S.-China relations just got better, boosting prospects for these three stocks

: U.S.-China relations just got better, boosting prospects for these three stocks

If you focus on inflation and Fed policy, you may have missed a key breakthrough in U.S.-China relations that will drive U.S.-listed Chinese stocks over the next six months.

But first, thanks to China expert Brad Loncar for his help, here is the background to this important geopolitical development. He is the founder of Loncar China BioPharma exchange-traded fund CHNA, +0.50%,wide exposure way of a Chinese biopharmaceutical company. (You can read more about ETFs here.)

The Ghost of Enron

Years ago, after the tech bubble burst in 2000, U.S. auditing firms came under fire for not publicly reporting accounting shenanigans that cost investors a lot of money— —Including Enron, the poster child for the collapse of that era. In response, Congress created an auditor called the Public Company Accounting Oversight Board (PCAOB). The Chinese government has never given American inspectors a peek at the books of Chinese companies for fear of revealing state secrets in its large state-owned enterprises. A few years ago, Congress said enough was enough and passed a law that said Chinese companies would be kicked out of U.S. exchanges if they didn’t get involved sooner. The standoff ended on Aug. 26 when the China Securities Regulatory Commission and the U.S. Securities and Exchange Commission (SEC) agreed on an audit agreement. “I always believed they would make a deal because it is not in China’s interest to lose access to the world’s largest financial market,” Loncar said. But the devil is in the details. So it remains to be seen how much cooperation U.S. regulators will get later this year when they try to conduct inspections. “Whether these audits will go smoothly remains a question,” Loncar responded to the SEC’s cautious comments. SEC Chairman Gary Gensler warned that the agreement “only makes sense if the PCAOB is truly able to conduct a full inspection and investigation of audit firms in China.” This remains an open question for U.S.-listed Chinese stocks, as no one knows for sure the outcome. But, like Loncar, I believe it will be successful. “Despite China’s controversy,” Loncar said, this week’s breakthrough “shows that China still wants to be part of the global financial community.” It seems unlikely that China will signal cooperation, only in the future change direction. This became apparent later this year when U.S. inspectors attempted to conduct audits, which should boost U.S.-listed Chinese companies. Here are my three favorites.

Yum China

If the US needed a brand ambassador to win over the average Chinese citizen, it would probably be worse than nominating Yum. Its KFC and Pizza Hut locations are very popular there. Now Yum is launching Taco Bells. Yum has also developed several fully owned emerging brands. All this makes Yum China the largest restaurant company in China. It operates more than 12,000 stores in 1,700 cities, including 8,400 KFC and 2,600 Pizza Hut. Owning Yum is more than just a bet that a tricky international accounting problem gets solved. It’s also a bet that Covid will eventually take a back seat – spreading in various less pathogenic forms, like the Spanish flu. That one is still going around every year, but hardly anyone notices because it’s become more moderate. This is how the flu virus has evolved, and if Covid continues on the same path, it will boost Yum China sales. Earlier this year, Yum had to close more than half of its restaurants due to the lockdown in China. Same-store sales fell 8% in the first quarter and profit margins fell. Yum also benefits from growing disposable income in China. When they make more money, people go out to eat.


Like Yum, China’s retail, cloud computing and media giant Alibaba is suffering from the country’s economic downturn related to the Covid-19 lockdown. “Everyone understands that China is at a different stage of the economic cycle than the rest of the world,” said Justin White, manager of T. Rowe Price All-Cap Opportunities Fund PRWAX, -3.08%. But as China’s economy recovers as the coronavirus subsides, Alibaba may get a boost, White said. That’s one of the reasons for his recent tenure at the Chinese internet giant. “Economically, China may improve in 2023, while the rest of the world will not,” White said. “Alibaba’s fundamentals are more likely to improve than to decelerate.” White deserves a listen, as his fund has outperformed the Morningstar Direct category and the benchmark index by a few percentage points over the past three years. Meanwhile, Morningstar Direct analyst Chelsey Tam said Alibaba continues to invest in international e-commerce platforms to drive long-term growth, and he has a five-star rating on the stock out of five. Larry McDonald, who wrote the Bear Trap report, listed Alibaba as a favorite for technical reasons. He noted that China’s Golden Dragon stock index recently retested its year-long downtrend line from above and rebounded sharply. “We expect Chinese stocks to break out in the next few weeks,” he said. “Clearly there was a capitulation sell-off in these names in March. The latest leg is another bite for Apple. We expect to outperform U.S. equities significantly in the coming months.”


BeiGene is A huge cancer treatment company. It has a big presence in China, and it’s a gateway to other big biopharma companies that want to sell therapeutics in China — like Amgen AMGN, – 2.05% and Bristol-Myers Squibb BMY, -0.43% . In total, BeiGene has the right to distribute 13 approved drugs in China. This makes the company’s stock particularly sensitive to the ebb and flow of U.S.-China geopolitical tensions. So when or if the accounting issues are resolved decisively, perhaps in December, the stock should rise again. Large companies like BeiGene need access to U.S. capital markets. BeiGene is not just a drug import channel. Revenue rose 120% to $304 million in the second quarter, helped by rapid growth in sales of its developed cancer treatments Brukinsa and Tislelizumab. Behind the scenes, BeiGene conducts nearly 80 ongoing and planned clinical trials across more than 40 drug candidates. More than 30 of these are end-stage “pivotal” trials. This means they can provide the data needed for application approval. Its broad pipeline covers 80% of the world’s cancers. Loncar points out that the issue of accounting firms is not the only one that stands out here. The company has manufacturing and research facilities in New Jersey, but also a manufacturing facility in China. In July, the U.S. Food and Drug Administration (FDA) filed a Biologics License Application to approve the use of tislelizumab in the United States, citing the inability to inspect Chinese plants. If China continues to lift its lockdown as the coronavirus subsides, FDA inspectors may be able to come in and give the green light. Of course, with the FDA, you never know what might go wrong, so there’s no guarantee that this is the only problem with tislelizumab approval in the U.S. but the tone of the company’s comments on the matter suggests that might be the case. “The FDA only cited the inability to complete inspections due to travel restrictions as the reason for the delay,” BeiGene said, without providing a timeline for when the issue would be resolved. BeiGene is founder-run and generally has an advantage in investing. Chief Executive Officer and Chairman John Oyler is a co-founder. It also has research collaborations with big names in the field such as Amgen and Novartis NVS, -0.88% . This is a seal of approval in my system for analyzing biotech companies.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned YUMC, BABA and BGNE. Brush featured CHNA, YUMC, BABA, and BGNE in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.



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