The world's second-largest economy grew faster than expected in the March-ended quarter, offering a glimmer of relief to officials grappling with efforts to bolster growth amidst prolonged weaknesses in the property sector and increasing local government debt.
Given the economic resilience and promising indicators, I have highlighted three fundamentally sound Chinese stocks: NetEase, Inc. (NTES), FinVolution Group (FINV), and Vipshop Holdings Limited (VIPS). These stocks are well-equipped to capitalize on the economy’s tailwinds.
Before we dive deeper into the fundamentals of the highlighted stocks, let’s briefly examine China’s prevailing economic scenario.
The Chinese economy is expanding at a healthy pace, surpassing both expectations and last year's performance. In the first quarter, the economy expanded by 5.3% year-over-year, higher than the 5.2% growth seen in the prior quarter and beating economists' forecasts of a 4.6% increase. This encouraging growth is spurred by ongoing support measures from Beijing, coupled with increased consumer spending during the Lunar New Year festival.
According to official figures, domestic tourists have contributed over 632 billion yuan (approximately $88 billion) to the economy, marking a notable 7.7% increase compared to holiday spending in 2019 and a substantial 47.3% year-over-year surge.
Moreover, the Chinese economy experienced a seasonally adjusted 1.6% quarter-on-quarter growth in the first quarter, outpacing the revised fourth-quarter expansion of 1.2%.
Looking ahead, Beijing has set a growth target of nearly 5% for 2024. The country aims to achieve an urban unemployment rate of around 5.5%, create 12 million new urban jobs, and maintain a consumer price index increase of approximately 3%.
Considering the country’s economic resurgence, coupled with a promising macroeconomic outlook, these three fundamentally sound Chinese stocks, NTES, FINV, and VIPS, might be opportunistic buys for those looking to diversify and strengthen their portfolios. Also, these stocks are trading at attractive valuations.
To that end, let’s delve into the fundamentals of the top three China stocks, beginning with the third choice.
Stock #3: NetEase, Inc. (NTES)
Headquartered in Hangzhou, the People's Republic of China, NTES is engaged in online gaming, music streaming, online intelligent learning services, and internet content services businesses both domestically and internationally. It operates through Games and Related Value-Added Services; Youdao; Cloud Music; and Innovative Businesses and Others segments.
On April 9, 2024, Blizzard Entertainment and NTES announced a renewed publishing deal, paving the way for the sequential return of Blizzard titles to mainland China beginning in the summer of 2024. The renewed publishing agreement includes popular titles like World of Warcraft®, Hearthstone®, and others from the Warcraft®, Overwatch®, Diablo®, and StarCraft® series.
Additionally, NTES also entered into an agreement with Microsoft Gaming to explore bringing new NetEase titles to Xbox consoles and other platforms.
On March 27, the company’s online division, NetEase Games, partnered with Sandsoft Gamesa for a new joint venture to conduct game publishing, marketing, live operations, and esports activities for the MENA region. This move helps NTES to expand its footprint and boost its revenue stream.
In terms of forward non-GAAP PEG, NTES is trading at 1.08x, 13.6% lower than the industry average of 1.25x. Likewise, its forward EV/EBIT multiple of 11.66 is 23.6% lower than the industry average of 15.27.
NTES’ total revenues increased 7% year-over-year to RMB27.14 billion ($3.76 billion) for the fiscal fourth quarter that ended December 31, 2023. Its gross profit grew 27% from the year-ago value to RMB16.82 billion ($2.33 billion).
Also, the company’s operating profit increased 54.9% from the prior-year quarter to RMB6.87 billion ($950.61 million). NTES’ non-GAAP attributable net income from continuing operations came in at RMB7.38 billion ($1.02 billion) and RMB2.27 per share, representing 53.4% and 54.4% year-over-year improvements.
The consensus EPS estimate of $1.72 for the fiscal first quarter (ended March 31, 2024) represents a 5% improvement year-over-year. The consensus revenue estimate of $3.71 billion for the to-be-reported quarter indicates a 4.8% increase from the same period last year. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.
NTES’ net income and EBITDA have increased at CAGRs of 34.6% and 19.6%, respectively, over the past three years, while its EPS has grown at a 35.9% CAGR.
The stock’s trailing-12-month gross profit and EBITDA margins of 60.95% and 29.73% are 23.9% and 60% higher than the 49.19% and 18.58% industry averages, respectively. Its trailing-12-month ROTA of 15.82% compares with the industry average of 1.38%.
Over the past year, the stock has gained 14.6% to close the last trading session at $101.86.
NTES’ solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It also has a B grade for Value, Stability, and Quality. Out of the 39 stocks in the B-rated China industry, it is ranked #4. To see the other ratings of NTES for Growth, Momentum, and Sentiment, click here.
Stock #2: FinVolution Group (FINV)
FINV, based in Shanghai, China, operates in the online consumer finance industry. The company runs a fintech platform that is empowered by proprietary technologies to link underserved borrowers with financial institutions.
On March 18, the company announced a 10.2% increase in its dividend for the fiscal year 2023 to $0.237 per American Depositary Share (ADS). This dividend is payable to its shareholders on May 7, 2024, marking its sixth consecutive year of dividend declarations.
With a four-year average dividend yield of 0.10% and the current dividend of $0.43 translating to a 2.66% yield, the company continues to provide consistent returns to its investors.
The company’s share repurchase program, coupled with this year's dividend payment, brings its capital return to about $160 million, which represents 48.5% of the company's net income for fiscal 2023.
In terms of forward non-GAAP P/E, FINV is trading at 3.78x, 64.9% lower than the industry average of 10.77x. The stock’s forward EV/Sales of 0.11x is 96.1% lower than the 2.83x industry average. Furthermore, the stock’s forward EV/EBIT multiple of 0.58 is 94.8% lower than the industry average of 11.13x.
In the fiscal fourth quarter that ended December 31, 2023, FINV’s total transaction value increased 7.8% year-over-year to RMB52.40 billion ($7.25 billion). Its net revenue rose 5.7% from the prior-year quarter to RMB3.22 billion ($446.15 million), while its operating profit amounted to RMB512.77 million ($70.97 million).
Non-GAAP net profit attributable to the company came in at RMB558.77 million ($77.34 million) and RMB0.41 per share in the same period. Also, its cash, cash equivalent, and restricted cash at the end of the period stood at RMB6.77 billion ($936.89 million), up 4.5% year-over-year.
Analysts expect FINV’s revenue for the current year (ending December 2024) to increase 7.8% year-over-year to $1.88 billion, while its EPS is expected to grow 10.2% from the year-ago value to $1.34 in the same period. In fiscal 2025, revenue and EPS are expected to reach $2.12 billion and $1.55, registering a year-over-year growth of 12.7% and 15.4%, respectively.
Moreover, its revenue and EBITDA have increased at CAGRs of 17.4% and 14.4%, respectively, over the past three years. Likewise, its EPS has grown at an 8.2% CAGR over the same period.
In addition, FINV’s trailing-12-month gross profit margin and ROCE of 78.59% and 17.92% are 31.5% and 69.4% higher than the industry averages of 59.78% and 10.58%, respectively. Likewise, its trailing-12-month 10.99% ROTA compares to the industry average of 1.07%.
The stock has gained 26.4% over the past year to close the last trading session at $5.07.
FINV’s POWR Ratings reflect these solid prospects. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has a B grade for Value, Stability, and Quality. Within the same B-rated industry, it is ranked #3. To see the ratings of FINV for Growth, Momentum, and Sentiment, click here.
Stock #1: Vipshop Holdings Limited (VIPS)
Headquartered in Guangzhou, VIPS operates online platforms in China. It operates in Vip.com; Shan Shan Outlets; and others segments. The company offers womenswear, menswear, sportswear, shoes and bags, accessories, skincare and cosmetics, and supermarket products.
VIPS’ forward EV/Sales and EV/EBITDA multiples of 0.34 and 3.53 are 71.5% and 62.5% lower than the industry averages of 1.19x and 9.43x, respectively. Likewise, its forward non-GAAP P/E ratio of 6.49 is 58.2% lower than the industry average of 15.53x.
During the fiscal fourth quarter, which ended December 31, 2023, VIPS’ total net revenues increased 9.2% year-over-year to RMB34.67 billion ($4.79 million). Its non-GAAP income from operations rose 42.4% from the prior-year quarter to RMB3.95 billion ($547.09 million).
The company’s non-GAAP attributable net income came in at RMB3.19 billion ($442.65 million) and RMB28.97 per share, representing year-over-year increases of 43.4% and 58.6%, respectively. Also, its free cash inflow stood at RMB7.35 billion ($1.02 billion), up 18.9% year-over-year.
Street expects VIPS’ EPS for the second quarter (ending June 2024) to increase 2.3% year-over-year to $0.60. Its revenue for the current quarter is expected to grow 6.1% from the year-ago value to $4.06 billion. Moreover, the company has topped the EPS estimates in all of the trailing four quarters, which is excellent.
VIPS’ net income and EBITDA have increased at CAGRs of 11.2% and 15.3%, respectively, over the past three years, while its EPS has grown at a 19% CAGR.
In addition, the stock’s trailing-12-month net income margin and ROCE of 7.19% and 23.29% are 52.2% and 105.1% higher than the industry averages of 4.73% and 11.35%, respectively. Likewise, its ROTA of 11.22% compares with the industry average of 4.32%.
VIPS’ shares have gained 8.6% over the past year to close the last trading session at $16.17.
It is no surprise that VIPS has an overall rating of A, equating to a Strong Buy in our proprietary rating system. It has an A grade for Value and a B for Momentum, Sentiment, and Quality. In the same industry, it is ranked #2.
In addition to the POWR Ratings stated above, we have also given VIPS grades for Growth and Stability. Get all VIPS ratings here.
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NTES shares were trading at $96.74 per share on Tuesday afternoon, down $5.12 (-5.03%). Year-to-date, NTES has gained 4.88%, versus a 9.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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