The end of Covid restrictions is helping to drive economic recovery in the Chinese Mainland as life gets back to normal for consumers and businesses alike. Therefore, quality China stocks Yum China Holdings, Inc. (YUMC), Vipshop Holdings Limited (VIPS), and Hello Group Inc. (MOMO) might be worth buying now.
China’s economic activity bounced back in the first quarter of 2023 with the removal of mobility restrictions and a surge in spending on services.
However, according to Sustaining Growth through the Recovery and Beyond, the latest China Economic Update released by the World Bank, growth momentum has slowed since April, indicating that China’s recovery remains fragile and dependent on policy support.
Nevertheless, in the World Economic Outlook, the International Monetary Fund said China is “rebounding strongly” following the reopening of its economy. It predicted that the country’s GDP would grow 5.2% this year and 5.1% in 2024.
Chinese authorities are attempting to boost lending via monetary easing. In March, the People’s Bank of China cut the Reserve Requirement Ratio to free up additional funds for bank lending.
This month there were ten basis point cuts to the 7-day reverse repo rate (used to manage short-term liquidity) and the Medium Term Lending Facility rate, with similar cuts to the Loan Prime Rate (China’s main policy rate) anticipated.
Let’s discuss the stocks mentioned above in detail:
Yum China Holdings, Inc. (YUMC)
Headquartered in Shanghai, China, YUMC owns, operates, and franchises restaurants in China. The company operates through two segments, KFC and Pizza Hut.
YUMC’s trailing-12-month net income margin of 6.43% is 53.1% higher than the 4.20% industry average. Its trailing-12-month EBITDA margin of 14.65% is 37.5% higher than the 10.65% industry average.
YUMC pays $0.52 annually as dividends which translates to a yield of 0.92% at the current price level. Its four-year average dividend yield is 0.83%. Its dividend payouts have grown at 11.6% CAGR over the past three years.
YUMC’s total revenues rose 6.8% year-over-year to $2.92 billion in the fiscal first quarter that ended March 31, 2023. Net income increased 10.9% year-over-year to $289 million. Earnings per common share increased 12.4% year-over-year to $0.69.
Analysts expect YUMC’s revenue to increase 25.9% year-over-year to $2.68 billion for the fiscal second quarter ending June 2023. Its EPS is expected to increase 119.4% year-over-year to $0.44 for the same quarter. Also, it has surpassed EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 19.4% over the past nine months to close the last trading session at $56.50.
YUMC’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
YUMC has a B grade for Growth, Momentum, Sentiment, and Quality. It is ranked #8 out of 45 stocks in the B-rated China category.
Click here to see YUMC’s additional POWR Ratings for Stability and Value.
Vipshop Holdings Limited (VIPS)
Headquartered in Guangzhou, the People’s Republic of China, VIPS operates online platforms in the People’s Republic of China. It operates in Vip.com; Shan Shan Outlets; and Others segments.
VIPS’ trailing-12-month asset turnover ratio of 0.55x is 57.6% higher than the 0.35x industry average. Its trailing-12-month net income margin of 6.70% is 59.5% higher than the 4.20% industry average.
During the fiscal first quarter ended March 31, 2023, VIPS’s total net revenues increased 9.1% year-over-year to RMB27.50 billion ($4 billion). Gross profit increased 17.9% year-over-year to RMB5.90 billion ($859.80 million), while its non-GAAP net income attributable to VIPS increased 45.8% year-over-year to RMB2.10 billion ($301.30 million).
VIPS’s revenue is expected to increase 6.6% year-over-year to $3.84 billion for the fiscal second quarter ending June 2023. Its EPS is expected to increase 21.8% year-over-year to $0.44 in the same quarter. Also, it has surpassed EPS estimates in each of the trailing four quarters.
Shares of VIPS have gained 96.2% over the past nine months to close the last trading session at $16.50.
VIPS’ robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
The stock has a B grade for Growth, Value, Sentiment, and Quality. It is ranked #7 in the same industry.
Beyond what is stated above, we’ve also rated VIPS for Momentum and Stability. Get all VIPS ratings here.
Hello Group Inc. (MOMO)
Headquartered in Beijing, the People’s Republic of China, MOMO provides mobile-based social and entertainment services in the People’s Republic of China.
MOMO’s trailing-12-month asset turnover ratio of 0.72x is 46.8% higher than the 0.49x industry average. Its trailing-12-month net income margin of 12.81% is 355.5% higher than the 2.81% industry average.
MOMO’s total net revenues came in at RMB2.82 billion ($410.46 million) for the fiscal first quarter that ended March 31, 2023. Income from operations increased 23.9% year-over-year to RMB436.18 million ($63.51 million).
Net income increased 34.9% year-over-year to RMB389.46 million ($56.71 million) and net income per share attributable to ordinary shareholders increased 38% year-over-year to RMB0.98.
Street expects MOMO’s revenue to be $426.24 million in the fiscal second quarter (ending June 2023). Its EPS is expected to increase 13.1% year-over-year to $0.36 for the same quarter. Additionally, it has topped consensus EPS estimates in each of the trailing four quarters.
The stock gained 108% over the past nine months closed its last trading session at $9.61.
It’s no surprise that MOMO has an overall rating of B, which translates to a Buy in our POWR Ratings system.
MOMO also has an A grade for Value and a B in Sentiment and Quality. It is ranked #9 in the same industry.
For additional ratings for MOMO for Growth, Momentum, and Stability, click here.
What To Do Next?
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YUMC shares were unchanged in premarket trading Monday. Year-to-date, YUMC has gained 3.84%, versus a 16.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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