The Chinese stock market has been amongst the worst-performing major markets over the past few years as it faced the challenges of stringent COVID restrictions, regulatory crackdowns on the private sector, geopolitical tensions, and expectations of slowing economic growth. Chinese authorities are not only trying to boost economic growth but also to stabilize its stock market through various positive measures.
Given this backdrop, it could be worth buying fundamentally strong Chinese stocks Alibaba Group Holding Limited (BABA), Hello Group Inc. (MOMO), and Tencent Holdings Limited (TCEHY).
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in China’s stock market and which factors will shape its prospects.
The Chinese stock market has been underperforming over the past few years as the economy struggled with deflation, record-high youth unemployment, sluggish demand, frequent COVID lockdowns, declining birth rates, crackdowns on large tech companies, and a property downturn. However, China's economy grew at 5.2% last year, surpassing the government’s estimates of 5%.
Chinese think tanks foresee real potential in 2024, expecting China to play a significant role in global growth. China's promising growth trajectory is underscored by upbeat economic growth prospects driven primarily by domestic consumption and investments.
Looking ahead, the Chinese Academy of Sciences forecasts a 5.3% economic growth in 2024, which surpasses the World Bank's projection of 4.5%. China’s economic recovery seems to be on track after the release of upbeat economic data, which showed that more than 61 million rail journeys were undertaken during the week-long Lunar New Year break, a 61% rise year-over-year and the most in five years.
In addition, domestic tourism spending rose 47.3% year-over-year to ¥632.70 billion ($88.84 billion). Nearly 474 million tourist trips were made during the festival. The inflow of positive economic data is expected to boost investor sentiments. Furthermore, investors would be rejoicing the People’s Bank of China’s decision to hold the rate on its one-year policy loans at 2.5%, in line with economists’ expectations.
Chinese authorities had previously attempted to boost the stock market before the holidays with state-owned funds ratcheting up stock purchases, restriction on short-selling, and the central bank cutting the reserve ratio requirement for banks by 50 basis points.
The People’s Bank of China, in its latest monetary policy implementation report, said that it would keep policy flexible to boost domestic demand while maintaining price stability. This has led to renewed optimism amongst investors and market watchers as they look forward to more monetary easing measures that would support China’s economy.
Considering these encouraging trends, let’s discuss the fundamentals of the three China stock picks, starting with the third choice.
Stock #3: Alibaba Group Holding Limited (BABA)
Based in Hangzhou, People's Republic of China, BABA provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses engage with their users and customers internationally. It operates through seven segments: China Commerce, International Commerce, Local Consumer Services, Cainiao, Cloud, Digital Media and Entertainment, Innovation Initiatives, and Others.
In terms of the trailing-12-month EBITDA margin, BABA’s 19.59% is 80.4% higher than the 10.86% industry average. Its 15.77% trailing-12-month levered FCF margin is 174.8% higher than the 5.74% industry average. Likewise, the stock’s 5.51% trailing-12-month Return on Total Assets is 32% higher than the 4.17% industry average.
For the fiscal third quarter that ended September 30, 2023, BABA’s revenue increased 5.1% year-over-year to RMB260.35 billion ($36.56 billion). Its non-GAAP net income and non-GAAP earnings per ADS came in at RMB47.95 billion ($6.73 million) and RMB18.97, respectively. Moreover, its adjusted EBITDA came in at RMB59.57 billion ($8.36 million), up marginally year-over-year.
Street expects BABA’s revenue for the quarter ended December 31, 2023, to increase 3.3% year-over-year to $30.57 billion, and its EPS for the same quarter is expected to increase 2.7% year-over-year to $1.56. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past month, the stock has gained 6.4% to close the last trading session at $73.91.
BABA’s POWR Ratings reflect a positive outlook. It has an overall rating of B, equating to a 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 Momentum and Quality. It is ranked #13 out of 41 stocks in the B-rated China industry. To see BABA’s Growth, Value, Stability, and Sentiment ratings, click here.
Stock #2: Hello Group Inc. (MOMO)
Headquartered in Beijing, People's Republic of China, MOMO provides mobile-based social and entertainment services in the People's Republic of China. The company offers Momo, a mobile application that connects people and facilitates social interactions based on location, interests, and various online recreational activities, including live talent shows, short videos, and social games.
In terms of the trailing-12-month EBIT margin, MOMO’s 17.30% is 105.3% higher than the 8.42% industry average. Its 15.58% trailing-12-month net income margin is 334.8% higher than the 3.58% industry average. Likewise, the stock’s 0.77x trailing-12-month asset turnover ratio is 57.3% higher than the 0.49x industry average.
For the fiscal third quarter, which ended on September 30, 2023, MOMO’s total net revenues stood at RMB3.04 billion ($426.86 million). Its income from operations increased 19.5% year-over-year to RMB621.76 million ($87.30 million).
In addition, the company’s attributable net income amounted to RMB546.43 million ($76.73 million) and RMB1.37 per share, up 21.2% and 24.5% over the prior year quarter, respectively.
Analysts expect MOMO’s EPS for the quarter ended December 31, 2023, to increase 1.8% year-over-year to $0.36. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined 3.7% to close the last trading session at $6.28.
MOMO’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #12 in the same industry. It has an A grade for Value and a B for Sentiment. Click here to see MOMO’s Growth, Momentum, Stability, and Quality ratings.
Stock #1: Tencent Holdings Limited (TCEHY)
Headquartered in Shenzhen, People's Republic of China, TCEHY is an investment holding company that offers value-added services (VAS), online advertising, fintech, and business services internationally. It operates through VAS, Online Advertising, FinTech, Business Services, and Others segments.
In terms of the trailing-12-month Return on Common Equity, TCEHY’s 25.51% is 503.9% higher than the 4.22% industry average. Likewise, its 21.65% trailing-12-month EBIT margin is 157% higher than the 8.42% industry average. Furthermore, its 32.48% trailing-12-month net income margin is 806% higher than the 3.58% industry average.
For the third quarter ended September 30, 2023, TCEHY’s revenues increased 10.4% year-over-year to RMB154.63 billion ($21.71 billion). Its gross profit increased 23.5% from the year-ago value to RMB76.52 billion ($10.74 billion).
For the same quarter, the company's non-IFRS profit attributable to equity holders of the company rose 39.3% year-over-year to RMB44.92 billion ($6.31 million). Also, its EPS for profit attributable to equity holders of the company stood at RMB3.75.
For the quarter ended December 31, 2023, TCEHY’s EPS and revenue are expected to increase 35% and 4.2% year-over-year to $0.60 and $21.94 billion, respectively. Over the past month, TCEHY’s stock has gained 3.5% to close the last trading session at $36.91.
TCEHY’s favorable outlook is reflected in its POWR Ratings. It has an overall rating of B, translating to a Buy in our proprietary rating system.
It has a B grade for Value and Stability. It is ranked #11 in the China industry. In total, we rate TCEHY on eight different levels. Beyond what we have stated above, we have also rated TCEHY for Growth, Momentum, Sentiment, and Quality. Get all the ratings of TCEHY here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
TCEHY shares were trading at $36.91 per share on Monday afternoon, up $0.28 (+0.76%). Year-to-date, TCEHY has declined -2.33%, versus a 5.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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