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For several years now, I’ve been chronicling the cheapness of Chinese stocks on Seeking Alpha and elsewhere. It started with coverage of Alibaba (BABA), possibly the cheapest big tech stock in the world, and then moved on to general coverage of Chinese markets. Ultimately, it turned out that I got into Alibaba a little too early, but the other Chinese stocks I’ve covered have performed quite well. PDD Holdings (PDD) and Postal Savings Bank of China (OTCPK:PSTVY) have been particularly strong performers, with the former delivering high capital gains and the latter having paid high dividends since I initiated coverage on it.
All of the stocks above are core holdings in my personal portfolio. I plan on holding them long term. They as a whole have performed well for me, despite my too-early entry into BABA.
As for other Chinese stocks, especially small caps, the opportunities there are in many cases even more interesting. Many Chinese small caps are net-nets, meaning their net working capital is less than their market capitalizations. As a result, they have the ability to pay large dividends relative to the price of admission.
And, they are doing so. A few months ago the Chinese net-net stock Lufax Holdings (LU) paid a special dividend worth $2.42, which provided a 49% yield to those buying on the date it was announced. The yield was even higher for those who bought before the payout was announced.
It was a similar story with DouYu (DOYU), another net-net that announced a special dividend just this week. The special was $9.74 per ADS, and the stock price was $12.70 when it was announced, so those who bought pre-announcement will collect a 76.6% yield. The stock is still cheap enough that those buying today can get a 55% yield from the special dividend being paid out in August.
So, there are many high dividend opportunities in China these days. Countless stocks with yields North of 6%, and a handful far into the double digits. In this article I will explore the two ultra-high yield Chinese stocks just mentioned, both as stock ideas and to illustrate the overall cheapness of the Chinese market.
Lufax Holdings
Lufax Holdings is a Chinese fintech and financial services company active in insurance, lending and wealth management. It uses technology (e.g. AI, machine learning) to deliver these services without customers having to come into an office and talk to a person. This helps Lufax’s margins, among other things.
Lufax had been doing very well for many years up until about 2022. That year, the company’s revenues and earnings both started declining. In the trailing 12 month period, they were down nearly 52% from the 2021 peak.
The source of the decline in Lufax Holdings’ earnings was weakness in technology platform based income. That took a large hit in 2022 and continued declining in 2023. Net interest income actually increased 30% from 2021 to 2022, but all other categories declined.
The simultaneous decrease in platform income and increase in net interest income appears to have come from a shift in Lufax’s strategy. The company said in its first quarter earnings release that it intended to take on more credit risk in order to generate more net interest income. That move is consistent with making more direct loans and facilitating fewer loans for third parties (which is what the technology platform business does).
If that’s the case then Lufax’s revenue and earnings decline may well be due to an intentional strategy shift, not a decline brought on by outside forces.
At any rate, other aspects of Lufax’s business are strong, despite the weak growth and profitability. The balance sheet, for example. The company has a 52% long term debt to equity ratio. Since this is a financial, debt doesn’t fully capture the liability picture all that well. The company has no deposits, though, and its total liabilities to equity ratio is just 1.5. Many financials have deposits equal to 10 or 20 times shareholders’ equity.
The stock is a net-net, with $28 billion in net working capital compared to a $1.7 billion market cap. Its ratio of current assets to current liabilities is a whopping 29! (Higher is better with this ratio). Finally, although the company’s GAAP earnings were negative in the trailing 12 month period, its free cash flow was positive and, at $2.85, just a few cents less than the current stock price!
The cheapness here is really extreme. I have a tiny position in Lufax holdings and I may add to it over time, depending on how the next earnings release looks.
DouYu
DouYu is a Chinese streaming service similar to Twitch. Users go on the site to stream activities like gaming and e-sports. The company’s ad revenue surged 109% in the most recent quarter, which prompted management to announce a $9.76 special dividend. The dividend yielded 76.6% when announced; the stock still hasn’t gone ex-dividend, and a 50% yield can still be collected by investors buying today.
DouYu’s earnings history shows a trajectory similar to that of Lufax: a decisive revenue peak in 2021, followed by a steep decline. In this company’s case, the reasons for the decline are a little different from Lufax’s. As part of its 2021 tech crackdown, China’s government cracked down on gaming, limiting the amount of screen time allowed for under-18s. Predictably, this caused revenue to decline at Chinese videogame companies. DouYu was also affected, as its business is mainly about streaming videogame sessions.
DouYu took a big hit thanks to China’s tech crackdown, with its stock price falling over 80% from top to bottom. It isn’t clear that the company’s fortunes are going to turn around right away. However, DouYu has gotten so cheap that it can afford to pay large dividends just based on unused balance sheet cash. The company has $940 million in current assets, $214 million in current liabilities, and no long term debt. Net working capital is therefore $726 million. The company’s market cap is $567 million. DouYu’s cash position alone is 89% of the company’s market cap, and there is no debt offsetting that amount. Finally, LU trades at 0.63 times book value. There is potential for serious dividends here, although I can’t say whether the stock price will recover: despite the surge in ad revenue, overall revenue remains in a downtrend.
The Bottom Line
What China’s massive special dividend yielders show is that there are many ways to make money in stocks. Western investors call China uninvestable, pointing to downward sloping stock charts, but ignore the large dividends that are being collected. I myself am collecting decent sized payouts on Postal Savings Bank; the more adventurous are collecting truly massive ones on stocks like Lufax and DouYu. I think small speculative positions in such stocks (let’s say 1% to 2% of a portfolio) may be appropriate for risk tolerant investors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.