Even in the face of major economic headwinds, such as declining trade and foreign investment, a turbulent housing market, and deflationary forces, China continues to rank among the globe's largest and fastest-growing economies. Moreover, the prospect of policymakers introducing substantial economic stimulus measures offers the potential to reignite investor confidence in the latter part of the year.
Against the optimistic backdrop, in this article, I have highlighted three fundamentally robust China stocks: Baidu, Inc. (BIDU), Alibaba Group Holding Limited (BABA), and NetEase, Inc. (NTES), which could be solid additions to your portfolio. But before delving into the fundamentals of these highlighted stocks, let us take a peek into the prevailing economic landscape of China.
China, the world’s second-largest economy, saw a year-on-year expansion of 6.3% in the second quarter of 2023, compared to the 4.5% recorded in the first quarter. Moreover, as per the National Bureau of Statistics, China's 5.5% year-over-year GDP expansion in the first half of 2023 surpasses other major economies with relatively high valuation and quality despite struggling with economic challenges.
China's economy has struggled to rebound after the removal of three years of stringent anti-pandemic measures at the beginning of the year. Factors such as a property sector slowdown, plummeting trade, and weak consumer demand have eroded confidence in the recovery.
However, policymakers have introduced a range of stimulus measures to bolster growth and support the property market and currency. The People's Bank of China took action by reducing the reserve requirement ratio for banks by 0.25 percentage points to 7.4%, effectively injecting liquidity into the financial system. Zhiwei Zhang, the chief economist at Pinpoint Asset Management, anticipates additional policy moves in the upcoming months.
Furthermore, recent data from the National Bureau of Statistics indicates that the stimulus measures are yielding positive results. China's retail sales and industrial production in August experienced stronger-than-anticipated growth.
In August, retail sales increased by 4.6% year-on-year, surpassing the Reuters poll's forecast of 3% growth. This growth rate was also higher than the 2.5% year-on-year pace observed in July. While industrial production, on the other hand, expanded by 4.5% year-on-year, surpassing the forecast of 3.9% and showing accelerated growth compared to the 3.7% increase recorded in July.
Considering China's committed efforts to enhance its economic prospects, it might be prudent to consider adding Chinese stocks BIDU, BABA, and NTES to your portfolio. To that end, let us dive into the fundamentals of these top-rated China stocks, beginning with number three.
Stock #3: Baidu, Inc. (BIDU)
With its headquarters in Beijing, BIDU operates as a Chinese-language Internet search provider. Its Baidu.com platform enables users to discover online information. The company operates through two segments, Baidu Core and iQIYI.
On August 25, BIDU announced the extension of its autonomous ride-hailing platform, Apollo Go, to include Wuhan Tianhe International Airport. This milestone represents the first instance in China where an autonomous ride-hailing service connects urban areas with an airport. It also marks the first time Chinese autonomous vehicles traverse city streets and highways.
Additionally, this development underscores BIDU’s ability to overcome intricate operational obstacles for its robotaxi fleet, paving the way for greater accessibility of autonomous ride-hailing services to the general public.
On July 16, BIDU secured the necessary licenses to operate its fully autonomous ride-hailing service in Shenzhen commercially. This means that BIDU's robotaxis are now permitted to offer ride-hailing services without a safety operator in the vehicle, marking Shenzhen as the fourth Chinese city to embrace this innovative service.
This strategic expansion significantly broadens the coverage of BIDU’s fully autonomous nationwide ride-hailing service, laying the groundwork for potential expansion to serve paying customers across China. These forward-looking expansions are expected to drive the company's growth prospects.
BIDU’s trailing-12-month EBIT margin of 15.88% is 86.7% higher than the industry average of 8.50%. Its trailing-12-month net income margin of 12.11% is 236% higher than the industry average of 3.60%. Furthermore, the stock’s trailing-12-month cash per share of $16.54 is significantly higher than the industry average of $1.48.
For the second quarter that ended June 30, 2023, BIDU’s total revenues increased 14.9% year-over-year to $4.69 billion, while its non-GAAP operating income rose 33.5% from the year-ago value to $1.01 billion.
In addition, the company’s non-GAAP net income and non-GAAP earnings per ADS stood at $1.10 billion and $3.11, up 44.3% and 42.8% from the prior-year quarter, respectively. Also, its adjusted EBITDA grew 29.2% from the year-ago value to $1.26 billion.
Street expects BIDU’s revenue and EPS for the fiscal third quarter (ending September 2023) to increase 5.9% and 4.6% year-over-year to $4.82 billion and $2.47, respectively. Moreover, the company topped its revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 18.3% over the past nine months to close the last trading session at $132.05
BIDU’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth, Value, and Sentiment. In the 44-stock B-rated China industry, it is ranked #8. Click here to see BIDU ratings for Momentum, Stability, and Quality.
Stock #2: Alibaba Group Holding Limited (BABA)
Based in Hangzhou, China, BABA provides merchants, brands, and businesses with technology and marketing prowess. It operates through seven segments: China Commerce; International Commerce; Local Consumer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others.
On September 7, BABA introduced a range of new products and improvements to its existing sourcing tools at its inaugural Co-Create conference that took place from September 7 to 8 in Las Vegas, which featured innovative products, interactive learning opportunities for entrepreneurs, and over 50 sessions with industry-leading experts.
These new products aim to empower entrepreneurs to enhance their sourcing and supply chain operations in the highly competitive landscape of small businesses.
On May 25, Alibaba Cloud, BABA's digital technology, and MongoDB, Inc. (MDB) announced a four-year extension of their strategic global partnership, which has experienced substantial growth since its inception in 2019.
By integrating the MDB database with Alibaba Cloud's unique capabilities, Alibaba Group's clients can accelerate their innovation and business scalability. This collaboration, powered by ApsaraDB for MDB, efficiently optimizes costs and boosts productivity. As a result, BABA could see an improved customer experience.
BABA’s trailing-12-month EBIT margin of 14.01% is 88.7% higher than the industry average of 7.42%. Its trailing-12-month levered FCF margin of 11.66% is 128.9% higher than the industry average of 5.09%. Furthermore, the stock’s trailing-12-month cash per share of $12.24 is 409% higher than the industry average of $2.40.
For the first quarter that ended June 30, 2023, BABA’s revenue increased 13.9% year-over-year to $32.29 billion. Its adjusted EBITDA grew 26.6% from the year-ago value to $7.18 billion. Also, the company’s non-GAAP net income and non-GAAP EPS rose 48.5% and 47.6% year-over-year to $6.20 billion and $0.30, respectively.
The consensus revenue estimate of $32.27 billion for the second quarter (ending September 2023) represents an 8% increase year-over-year. The consensus EPS estimate of $2.10 for the ongoing quarter indicates a 16.1% improvement year-over-year. Moreover, the company has an excellent earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.
Over the past year, the stock has surged 10.7% to close the last trading session at $87.22.
BABA’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Growth and Sentiment and a B for Quality. Within the same B-rated industry, it is ranked #7. Click here to see the other ratings of BABA for Value, Momentum, and Stability.
Stock #1: NetEase, Inc. (NTES)
Headquartered in Hangzhou, China, NTES engages in online games, music streaming, online intelligent learning services, and internet content services businesses in China and internationally. The company operates through Games and Related Value-Added Services; Youdao; Cloud Music; and Innovative Businesses and Others segments.
On August 17, NTES unveiled the establishment of a new game development studio, T-Minus Zero Entertainment, in Austin, Texas. This studio is the latest addition to NTES Games' ever-expanding portfolio and is under the leadership of Rich Vogel, a seasoned game developer with an impressive track record, having spearheaded the launch of several studios, including Sony Online Entertainment Austin, Bioware Austin, etc.
The goal is to craft compelling and meaningful gaming universes that foster a strong sense of community and engagement among players worldwide.
On July 14, NTES announced its strategic partnership with RYCE Entertainment, a prominent music and entertainment company in China. This strategic partnership will see both companies working together to promote RYCE Entertainment's renowned artists and music catalog within China, leveraging their combined strengths in music production and distribution.
Through this partnership, NTES aims to further broaden its extensive music content library.
The stock’s trailing-12-month ROCE of 23.85% is 478.7% higher than the industry average of 4.12%. Its trailing-12-month net income margin of 25.95% is 620.1% higher than the industry average of 3.60%. Furthermore, the NTES’ trailing-12-month cash per share of $2.73 is 84.6% higher than the industry average of $1.48.
For the fiscal second quarter, which ended on June 30, 2023, NTES’ net revenues increased 3.7% year-over-year to $3.31 billion, while its gross profit rose 11.1% from the year-ago value to $1.98 billion.
Also, its operating profit improved 22.6% from the prior-year quarter to $836.08 million. In addition, the company’s non-GAAP net income attributable to shareholders came in at $1.24 billion, up 66.7% year-over-year.
Analysts expect NTES’ revenue for the fiscal third quarter (ending September 2023) to increase 9.6% year-over-year to $3.74 billion, while its EPS during the same period is expected to be $1.43 and further improve by 2.5% per annum over the next five years. Moreover, the company surpassed its EPS estimates in each of the trailing four quarters, which is promising.
NTES’ shares have surged 38.8% year-to-date and 41.8% over the past nine months to close the last trading session at $100.82.
It’s no surprise that NTES has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Stability and Sentiment and a B for Value and Quality. In the same industry, it is ranked first.
In addition to the POWR Ratings we’ve stated above, we also have NTES’ ratings for Growth and Momentum. Get all NTES ratings here.
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BABA shares were trading at $86.06 per share on Tuesday afternoon, down $1.16 (-1.33%). Year-to-date, BABA has declined -2.30%, versus a 12.97% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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