After an abrupt relaxation of strict Covid restrictions was accompanied by widespread confusion and infection, the Chinese economy and society are humming back to life. With a massive tailwind of political will and potential, Hello Group Inc. (MOMO), China Automotive Systems, Inc. (CAAS), and Tarena International, Inc. (TEDU) could be more attractive choices than Alibaba Group Holding Limited (BABA) to give portfolios exposure to a resurgent China.
While the Chinese e-commerce giant surpassed analyst estimates in its recent earnings release, BABA’s China commerce revenue in the last three months of 2022 fell by 1% to the equivalent of $24.64 billion, accounting for 69% of total revenue.
To combat this slowdown, BABA has looked for growth overseas through its Southeast Asia business Lazada and the global e-commerce site AliExpress, while implementing efforts to control costs in all of its businesses, including a sequential reduction of the headcount by 4000 during the previous quarter.
In addition to strict zero-covid restrictions, China’s crackdown on big tech over the past two years has also hurt the e-commerce company’s prospects. Founder Jack Ma’s public speech only exacerbated matters.
Despite the recent relaxation in regulatory tightening, BABA faces increasing pressure on its leadership from its established rivals and new disruptors alike. JD.com, Inc. (JD), one of BABA’s largest e-commerce competitors, is reportedly planning a ¥10 billion yuan subsidy program, sparking fears of a price war.
Given the threat of disruption, also highlighted by Charlie Munger, BABA has an overall rating of C in our POWR Ratings system and is ranked #19 of 50 China stocks.
However, BABA’s CEO Daniel Zhang has also remarked that all businesses “want to have a bumper year in 2023 to make up for everything they lost over the past three years.” JPMorgan’s global market strategist Chaoping Zhu also forecasted service sectors to be the early beneficiaries of the release of the pent-up demand. In addition, the outcome of the reopening is due to be reflected from this quarter onwards.
Hence, it could be opportune to invest in shares of the following growing Chinese businesses for solid returns in the year ahead.
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.
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.
Yan Tang, Chairman and CEO of MOMO, highlighted that the product and operational enhancements, coupled with the efforts to improve cost efficiency, allowed the company to see meaningful bottom-line improvement on a sequential basis.
For the third quarter of fiscal 2022, which ended September 30, MOMO’s total net revenues came in at ¥3.23 billion ($467.71 million). During the same period, the Non-GAAP net income attributable to MOMO came in at ¥535.8 million ($77.59 million), or ¥2.60 ($0.38) per ADS.
Analysts expect MOMO’s revenue and EPS for fiscal 2023 to increase 0.8% and 3.9% year-over-year to $1.86 billion and $1.32, respectively. The company has also impressed by surpassing consensus EPS estimates in each of the trailing four quarters.
MOMO has gained 72.2% over the past six months to close the last trading session at $9.16, above the 200-day moving average of $6.30.
MOMO has an overall rating of B, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
MOMO has an A grade for Value and a B for Quality. It is ranked #11 of 50 China stocks.
Click here to access the additional ratings for MOMO’s Stability, Growth, Sentiment, and Momentum.
China Automotive Systems, Inc. (CAAS)
CAAS is a holding company headquartered in Jingzhou, the People’s Republic of China. The company manufactures automotive systems and components in China through its subsidiaries and sells its products to original equipment manufacturing customers (OEMs).
On December 12, CAAS announced that it had introduced a new series of Electric Power Steering (“EPS”) systems for BYD Company Limited (BYDDF), China’s largest EV producer.
This follows CAAS’ November 29 announcement of an expansion of strategic partnership with BYDDF for future autonomous driving and looks promising for both companies.
For the third quarter of the fiscal, which ended September 30, net sales of CAAS increased 26.8% year-over-year to $137.2 million. During the same period, the company’s gross profit increased 24.4% year-over-year to $20.9 million, while its income from operations increased 716.7% year-over-year to $4.9 million.
The quarterly net income attributable to CAAS’ common shareholders came in at $7.5 million or $0.24 per share, compared to a net loss of $0.3 million or $0.01 during the previous-year quarter.
Ahead of its earnings release, CAAS’ revenue for fiscal 2022 is expected to increase 8.3% year-over-year to $539.23 million, while its EPS is estimated to grow 72.2% year-over-year to $0.62. Moreover, CAAS has impressed by surpassing consensus EPS estimates in three of the trailing four quarters.
The stock has gained 74.2% over the past six months and 181.1% over the past year to close the last trading session at $7.42, above its 50-day and 200-day moving averages of $7.18 and $4.69, respectively.
The positive outlook of CAAS is reflected in its overall rating of A, which translates to a Strong Buy in our POWR Ratings system. The stock has an A grade for Value and Sentiment and a B for Growth. CAAS ranks #2 of 50 stocks in its category
Beyond what is stated above, we have also rated CAAS for Momentum, Quality, and Stability. Get all CAAS ratings here.
Tarena International, Inc. (TEDU)
Beijing-based TEDU provides professional education services through full-time and part-time classes under the Tarena brand in the People’s Republic of China. The company operates through two segments: Adult Professional Education and Childhood & Adolescent Quality Education Services.
On February 27, 2023, TEDU announced that it had become one of the first approved ecosystem partners of ERNIE Bot, the generative AI chatbot developed by Baidu, Inc. (BIDU).
Being part of the ecosystem will give TEDU priority access to ERNIE Bot to explore its applications in various educational scenarios, which marks the first application of the conversational language model in professional education.
On November 28, TEDU announced that its board of directors had authorized a new share repurchase program over the next twelve months. As per the program, the company is authorized to repurchase up to an aggregate value of US$3 million of its Class A ordinary shares (including in the form of ADS) during the 12 months beginning November 28, 2022.
Stakes would be repurchased through various legally permissible means, depending on the market conditions and in accordance with applicable rules and regulations. While increasing the intrinsic value of the holdings of existing shareholders, this program also underscores the management’s confidence in TEDU’s business prospects.
On November 15, TEDU announced that it had been selected for inclusion into the list of "Approved Education Providers" for "Promoting Employment of College Graduates through Connecting Talent Supply with Employers' Demand (Phase II) ("Connect Program"), recently published by the Department of College Students Affairs of the Ministry of Education (MoE).
As a result, TEDU stands to benefit from the recognition and guidance of the Ministry of Education as it launches education and employment support programs that will help college students obtain the knowledge and skills demanded by employers.
For the third quarter of the fiscal, which ended September 30, TEDU’s net revenues increased 4.6% year-over-year to ¥643.3 million ($93.15 million), while its gross profit increased 13.1% year-over-year to ¥354.2 million ($51.29 million). The top-line growth was mainly driven by higher IT-focused supplementary STEAM education enrollment.
During the same period, the company’s non-GAAP operating income and net income came in at ¥30.2 million ($4.35 million) and ¥37.2 million ($5.39 million), respectively, compared to losses of ¥84.4 million ($12.22 million) and ¥90.5 million ($13.11 million) during the previous-year quarter. Consequently, the non-GAAP net income per ADS came in at ¥3.23, compared to a loss of ¥7.84 during the previous-year quarter.
The stock has gained 79.4% over the past year to close its last trading session at $4.61. The stock is trading at 014x its trailing-12-month sales, which is 84.1% below the industry average of 0.91.
TEDU’s POWR Ratings reflect its promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It also has an A grade for Growth and a B for Value and Quality.
Unsurprisingly, TEDU tops its category of 42 Chinese stocks. Click here to see additional POWR Ratings for Momentum, Sentiment, and Stability for TEDU.
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BABA shares were trading at $89.04 per share on Friday morning, down $0.71 (-0.79%). Year-to-date, BABA has gained 1.08%, versus a 4.91% 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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