Amid macroeconomic clouds of slowdown and deflation, fundamentally strong Chinese stocks Alibaba Group Holding Limited (BABA), Trip.com Group Limited (TCOM), and Hello Group Inc. (MOMO) are showing the promise of a silver lining that has kept institutional investors interested.
After emerging from a self-imposed hiatus, on account of the controversial and now revoked “Zero-Covid policy,” the Chinese market and economy were broadly expected to reclaim its role as the engine of growth for the global economy. The initial signs were encouraging with quarterly and monthly economic data, including a rebound in retail sales and resilience in the labor market, all exceeding expectations.
However, of late, the factory of the world seems to have become a victim of those high expectations. With imports and exports in July declining by 14.5% and 12.4% year-over-year, respectively, to miss Street expectations, the Chinese economy is finding itself navigating through a full-blown deflation. With the jury still out on the effectiveness of a potential Chinese stimulus amid low consumer confidence, President Joe Biden has labeled the country a “ticking time bomb.”
However, since, more often than not, the truth lies somewhere in between, forecasts of doom and gloom may be as unrealistic as sky-high expectations of an accelerated and sustained economic recovery right out of the block.
With cars and suitcases being two of the few higher-value export categories that significantly increased in the first seven months of the year, travel has been gaining ground within China as much as it is in vogue outside it. Hence, UBS could be right in forecasting transitory deflation and a return to growth during the fourth quarter.
In the above context, let’s look closer at the featured stocks.
Alibaba Group Holding Limited (BABA)
Hangzhou-based Chinese e-commerce giant BABA operates through seven segments: China Commerce; International Commerce; Local Customer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others. Institutions own 14.6% shares of BABA. Of the 1,354 institutions holding BABA shares, 536 have increased their position in the stock.
On June 19, BABA announced the addition of a Renmibi ("RMB") counter for trading the company’s shares effective from the same day. The company has since become a security with counters denominated in Hong Kong Dollars ("HKD") and RMB and has been designated by the Hong Kong Stock Exchange as dual-counter security.
Due to the strong business momentum and focus on operating efficiency across businesses, for the fiscal quarter that ended June 30, 2023, BABA’s revenue increased by 14% year-over-year to RMB 234.16 billion ($ 32.48 billion). During the same period, the company’s adjusted EBITDA increased by 32% year-over-year to RMB 45.37 billion ($6.29 billion).
Consequently, BABA’s non-GAAP net income for the quarter increased 48% year-over-year to RMB 44.92 billion ($6.23 billion), or RMB 17.37 ($2.41) per ADS.
Analysts expect BABA’s revenue and EPS for the fiscal year 2023 to increase by 7.3% and 12.1% year-over-year to $132.45 billion and $8.69 per share, respectively. Both metrics are expected to keep increasing over the next two fiscals to come in at $157.07 billion and $10.80 by 2025. The company has also impressed by surpassing consensus EPS estimates in each of the trailing four quarters.
Over the past month, BABA’s stock, with institutional ownership of 39.86%, has gained 9.4% to close the last trading session at $99.21, above its 50-day and 200-day moving averages of $90.49 and $90.38, respectively.
BABA’s POWR Ratings reflect a robust outlook. It has a B grade for Sentiment and Quality. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
BABA is ranked #19 out of 45 stocks in the B-rated China category. Click here for additional ratings for BABA’s Growth, Value, Momentum, and Stability.
Trip.com Group Limited (TCOM)
TCOM, based in Shanghai, operates as a one-stop travel platform that integrates a comprehensive suite of travel products and services and differentiated travel content. Institutions own 45.2% shares of TCOM.
On June 30, TCOM announced the completion of its repurchase right offer relating to its 1.50% Exchangeable Senior Notes due 2027.
With no Exchangeable Note validly surrendered and not withdrawn prior to the expiration of the repurchase right offer, the $500 million aggregate principal amount of the Exchangeable Notes will remain outstanding and continue to be subject to the existing terms. This demonstrates the creditors’ faith in TCOM’s ability to service its debt.
Due to the reopening of the Chinese economy followed by a domestic travel boom, TCOM’s net revenue for the fiscal first quarter that ended March 31, 2023, increased by 123.9% year-over-year to RMB 9.20 billion ($1.28 billion). During the same period, the company’s income from operations came in at RMB 2.24 billion ($310.74 million), compared to a loss of RMB 359 million ($49.80 million) during the previous-year quarter.
Consequently, TCOM's non-GAAP net income for the quarter came in at RMB 2.07 billion ($287.16 million), or RMB 3.07 ($0.43) per ADS, compared to a non-GAAP net loss of RMB 36 million ($4.99 million), RMB 0.06 ($0.01) per ADS, during the previous-year quarter.
Analysts expect TCOM’s revenue and EPS for the fiscal year ending December 31, 2023, to increase 104.1% and 512.8% year-over-year to $5.90 billion and $1.74, respectively. Both metrics are expected to increase by 16.9% and 19.2% in the next fiscal year to $6.90 billion and $2.08, respectively.
TCOM has also impressed by surpassing consensus EPS estimates in three of the trailing four quarters.
TCOM’s stock, with institutional ownership of 73.75%, has gained 18.2% over the past month to close the last trading session at $41.36, above its 50-day and 200-day moving averages of $36.54 and $34.72, respectively.
TCOM’s overall rating of B translates to a Buy in our POWR Ratings system. It has an A grade for Growth and a B for Momentum, Sentiment, and Quality.
TCOM is ranked #17 of 45 peers in the B-rated China stocks category. Click here for additional ratings on TCOM’s Value and Stability.
Hello Group Inc. (MOMO)
MOMO, headquartered in Beijing, the People’s Republic of China, provides mobile-based online social and entertainment services in the country. The company’s product portfolio includes two platforms: Momo and Tantan. Institutional investors own 36.1% shares of MOMO. Of the 178 institutions holding MOMO shares, 82 recently increased their positions in the stock.
MOMO is a mobile application that connects people and facilitates social interactions based on location, interests, and various online recreational activities. On the other hand, Tantan added through an acquisition in May 2018, is designed to help its users find and establish romantic connections and meet interesting people.,
On June 30, MOMO announced the results of its previously announced repurchase right offer relating to its 1.50% Exchangeable Senior Notes due 2025.
The $322.11 million aggregate principal amount of the 2025 Notes were validly surrendered and not withdrawn before the repurchase right offer expires. The company has accepted all surrendered Notes for repurchase and has forwarded cash in payment for distribution to the applicable holders.
This demonstrates MOMO’s fiscal strength to foreclose its debt and cut future expenses in an environment of increasing borrowing costs.
For the fiscal 2023 first quarter that ended March 31, MOMO’s total net revenues came in at RMB 2.82 billion ($391.20 million). During the same period, the Non-GAAP net income attributable to MOMO increased by 18.4% and 21.6% year-over-year to RMB 471.9 million ($65.46 million), or RMB 2.36 ($0.33) per ADS, respectively.
Analysts expect MOMO’s revenue for fiscal year 2023 to come in at $1.73 billion, while its EPS is expected to increase by 8.7% year-over-year to $1.45. Both metrics are expected to increase by a further 4.4% and 5.2% to come in at $1.80 billion and $1.53, respectively. The company has also impressed by surpassing consensus EPS estimates in each of the trailing four quarters.
MOMO, with an institutional ownership of 66.5%, has gained 4% over the past month and 9.3% year-to-date to close the last trading session at $10.39, above its 50-day and 200-day moving averages of $9.88 and $8.64, respectively.
MOMO has an overall rating of B, which equates to Buy in our POWR Ratings system. It has an A grade for Value and a B for Sentiment and Quality.
MOMO is ranked #8 in the same category. Click here to access the additional ratings for MOMO’s Stability, Growth, and Momentum.
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BABA shares were trading at $95.72 per share on Friday afternoon, down $3.49 (-3.52%). Year-to-date, BABA has gained 8.66%, versus a 17.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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