When we talk about a diversified portfolio, it would be a big mistake to ignore geographical diversification. In general, emerging markets will grow faster than developed markets through the decade. This will translate into relatively higher returns from an emerging market stock portfolio. Besides blue-chip stocks, there are several attractive emerging market penny stocks to consider.

Several penny stocks are indeed purely speculative. I am not looking at these names among emerging market penny stocks. There are fundamentally strong stories that are at an early growth stage. If these businesses continue to grow, the valuation of these stocks will be meaningfully higher in the coming years. For this column, I focus on penny stocks from China that hold potential.

As the world struggles with multiple challenges, it’s a good time to buy some penny stocks for the portfolio. Overall, I would limit my penny stock exposure to 15% of the total portfolio.

Let’s discuss the reasons to be bullish on these emerging market penny stocks.

Waterdrop Inc (WDH)

Waterdrop (NYSE:WDH) stock is an attractive name among emerging market penny stocks. WDH stock has surged by 96% in the last 12 months. However, the stock remains undervalued, considering the revenue growth potential and cost control.

As an overview, Waterdrop is a technology platform that’s dedicated to healthcare and insurance services. For Q3 2022, the company reported revenue of $108.6 million, which was higher by 10.1% on a year-on-year basis. For the same period, the company reported reduced operating costs and expenses by 50.5% on a year-on-year basis. This translated into positive operating cash flows.

Specific to the business, Waterdrop continues to expand its product offering. In Q3 2022, the company had 536 insurance products on its platform. With sustained growth in the offering, insurance premium through the platform is likely to swell further.

I must mention that the market values Waterdrop at $1.1 billion. As of Q3, the company reported $504.5 million in cash and equivalents. The strong cash buffer provides headroom for growth and underscores the view that the stock is undervalued.

NaaS Technology (NAAS)

Naas Technology (NASDAQ:NAAS) stock has trended higher by 14% in the last 12 months. However, the best part of the rally is still to come for this penny stock.

Clean energy has been a major investment theme throughout the decade, and NaaS Technology is positioned to benefit. The company is among the largest EV charging service providers in China. As of September 2022, the company had connected 434,000 chargers with a total charging volume of 1,892GWh.

An important point to note is that NaaS has multiple revenue streams. Over time, recurring service-based revenue will likely boost EBITDA margin and cash flows.

From a growth perspective, China’s charging stations are expected to grow at a CAGR of 43.8% through 2030. In January, NaaS formed a joint venture with HyperStrong Technology to develop the energy storage business. With diversification within the green energy space, the growth outlook is robust.

Dingdong (Cayman) Limited (DDL)

Dingdong (Cayman) Limited (NYSE:DDL) stock has been marginally lower in the last 12 months. Considering the business potential and financial developments, a strong move on the upside seems likely.

As an overview, Dingdong is a fresh grocery e-commerce company in China. For Q4 2022, the company reported revenue of $899 million, which was higher by 13.1% on a year-on-year basis.

It’s also worth noting that the company’s operating cost has declined year-on-year. This has allowed the company to achieve positive operating cash flows for 2022. As cash flows swell with operating leverage, DDL stock is likely to move higher.

Another point to note is that the company closed 2022 with cash and short-term investments of $941.4 million. Strong financial flexibility will allow the company to invest in strengthening its supply chain capabilities.

With a promising industry outlook and encouraging financial metrics, DDL stock is a potential multibagger.

On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.

Read More: Penny Stocks — How to Profit Without Getting Scammed

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.