Chinese stocks listed on U.S. exchanges declined in price considerably last week due to worries over the Fed’s aggressive interest rate increases and the potential delisting of such ADRs from the New York Stock exchange and Nasdaq. This month, the Fed delivered its first interest rate increase of 25 basis points and indicated that it intended to administer multiple increases this year.
Furthermore, the Biden Administration recently announced its intention to deter China from aiding sanctions-hit Russia and refrain from taking advantage of economic opportunities created by sanctions. The United States extended a warning that it might enforce export controls on China as a response, worsening the already strained relationship between the two countries.
Given the backdrop, we think it advisable to avoid Chinese stocks like iQIYI, Inc. (IQ) and New Oriental Education & Technology Group Inc. (EDU), given their bleak growth prospects.
iQIYI, Inc. (IQ)
Headquartered in Beijing, China, IQ provides online entertainment services under the iQIYI brand in the People’s Republic of China. The company offers products and services that include internet video, online games, live broadcasting, e-commerce, and a social media platform. It also provides membership, online advertising, and content distribution services.
Last December, a class action was filed against Goldman Sachs Group Inc. and Morgan Stanley on behalf of the shareholders in IQ for alleged violations of securities laws. The class action was filed in the United States District Court on behalf of the investors who purchased or acquired IQ shares from the defendants’ trades from March 22, 2021, to March 29, 2021.
In its fiscal 2021 fourth quarter, ended Dec. 31, 2021, IQ’s total revenues decreased marginally year-over-year to RMB7.39 billion ($1.16 billion). IQ’s total operating costs and expenses are valued at RMB8.36 billion ($1.31 billion). The company's operating loss amounted to RMB515.54 million ($2.44 billion) for the fourth quarter. Its net loss attributable to IQ and net loss per ADS amounted to RMB1.01 billion ($158.62 million) and RMB1.26, respectively.
The $1.14 billion consensus EPS estimate for its fiscal year 2022 first quarter, ending March 31, 2022, represents an 8.4% year-over-year decline. The EPS estimate amounted to a negative $0.09 for the current quarter. It is no surprise that the company has missed the consensus EPS estimates in three of the four trailing quarters.
The stock declined 74% in price over the past year and 47.4% over the past six months. IQ closed Friday's trading session at $4.31.
IQ's POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
IQ has a grade of D for Sentiment, Quality, and Momentum. Within the F-rated China industry, it is ranked #37 of 51 stocks. To see IQ's POWR Ratings for Growth, Value, and Stability, click here.
New Oriental Education & Technology Group Inc. (EDU)
EDU provides private educational services under the New Oriental brand in the People’s Republic of China. It is headquartered in Beijing. The company operates through three segments: K-12 AST, Test Preparation and Other Courses; Online Education; and Others. EDU offers educational programs, services, and products to students through a network of more than 122 schools, 1,547 learning centers, and 11 bookstores.
EDU's total operating costs and expenses increased 53.9% year-over-year to $2.70 billion for the six-month period ended Nov. 30, 2021. EDU’s operating loss grew 722.6% year-over-year to $735.67 million. The company’s net loss came in at $907.96 million, registering a 608.3% increase from the prior-year period. Its net loss per ADS attributable to EDU amounted to $0.52, indicating a 471.4% year-over-year increase.
The Street expects EDU's revenue to amount to $2.73 billion for its fiscal year 2022, ending May 2022, representing a 36.2% year-over-year decline.
Shares of EDU have declined 37.9% in price year-to-date and 90.9% over the past year. It closed Friday's trading session at $1.26.
EDU's POWR Ratings reflect its poor prospects. The company has an overall rating of D, which equates to a Sell in our proprietary rating system.
EDU has an F grade for Sentiment and Growth. It has a D grade for Stability. It is ranked #41 of 51 stocks in the China industry. To see additional POWR Ratings (Quality, Value, and Momentum) for EDU, click here.
IQ shares were trading at $4.66 per share on Monday afternoon, up $0.35 (+8.12%). Year-to-date, IQ has gained 2.19%, versus a -4.03% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
2 Popular Chinese Stocks to Avoid Like the Plague StockNews.com
