China's third-quarter economic expansion surpassed expectations, buoyed by policy backing, indicating Beijing's readiness to attain its roughly 5% growth objective for the year.
Given this favorable economic backdrop, it could be wise to invest in resilient China stocks LexinFintech Holdings Ltd. (LX), X Financial (XYF), and Tarena International, Inc. (TEDU), all of which exhibit substantial growth potential.
China's economy exceeded expectations in the third quarter, with September witnessing unexpected boosts in consumption and industrial activity. This indicates that recent policy actions are effectively supporting a fragile resurgence, demonstrating a faster-than-anticipated growth trajectory.
In July-September, the country’s GDP expanded 4.9% year-over-year, surpassing analysts' projected 4.4% growth. Third-quarter GDP surged by 1.3% on a quarterly basis, a notable acceleration from the revised 0.5% in the second quarter and exceeding the anticipated 1.0% growth.
In addition, industrial output in China grew 4.5% year-over-year in September, matching August figures and surpassing analyst expectations of 4.3%. Retail sales also exceeded predictions, rising 5.5% in September, accelerating from a 4.6% increase in August. Analysts expected retail sales to expand 4.9% last month.
Furthermore, China's foreign trade surged to 30.8 trillion yuan ($4.21 trillion) in the first nine months of 2023. This sets an optimistic backdrop for upcoming economic events such as the Belt and Road Forum, the Canton Fair, the China International Import Expo, and the China International Supply Chain Expo.
These figures indicate that China remains in line with the government's 2023 growth target of 5%. Notably, Citigroup Inc. (C) now anticipates a 5.3% GDP growth in 2023, up from their earlier estimate of 5%, while JP Morgan Chase & Co. (JPM) and Nomura Holdings, Inc (NMR) project growth rates of 5.2% and 5.1%, respectively.
Furthermore, Goldman Sachs (GS) has revised its forecast to 5.3%, slightly lower than the previous 5.4%, yet exceeding Beijing's 5% target. JP Morgan economists, led by Haibin Zhu, find the robust September performance encouraging, expecting this economic momentum to continue in the coming months.
The World Bank has also upgraded its projection for China's 2023 economic growth to 5.6%, a 1.3 percentage point increase from its January forecast. This outlook is more optimistic than the International Monetary Fund's April projection in its World Economic Outlook, which anticipated China's growth to remain at 5.2% in 2023.
"Notably, the rapid reopening of China's economy contributed materially to an upward revision to this year's growth forecast," the World Bank report said.
In light of these encouraging trends, let’s look at the fundamentals of the three China stock picks, beginning with number 3.
Stock #3: LexinFintech Holdings Ltd. (LX)
Based in Shenzhen, China, LX offers online consumer finance services through its platform Fenqile.com. In addition, the company provides financial institutions and partners with technology-driven services to boost revenue, manage risk, improve efficiency, enhance service quality, optimize collections, and reduce costs.
In terms of forward non-GAAP P/E, the stock is trading at 1.56x, 81.9% lower than the 8.61x industry average. Its forward EV/Sales of 0.67x is 77.7% lower than the 3.01x industry average. Moreover, the stock’s forward EV/EBITDA of 3.70x compares to the 10.08x industry average.
Over the past three years, LX’s net income and EPS increased at a CAGR of 8.6% and 9.5%, respectively. The company’s total assets and common equity grew at respective CAGRs of 2.9% and 27.4% during the same period.
For the second quarter that ended June 30, 2023, LX’s operating revenue increased 26.6% year-over-year to $421.42 million. Its non-GAAP EBIT rose 89.7% from the year-ago value to $66.89 million.
In addition, adjusted net income and adjusted net income per ordinary share attributable to ordinary shareholders of the company grew 96.5% and 109.6% from the prior year’s quarter to $56.46 million and $0.15, respectively.
The consensus revenue estimate of $1.62 billion for the fiscal year ending December 2023 reflects a 12.6% year-over-year improvement. Likewise, the consensus EPS estimate of $1.15 reflects a 45.9% rise from the prior year. LX’s shares have gained 20.1% over the past year to close the last trading session at $1.79.
LX’s strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
LX has an A grade for Value and Sentiment and a B for Growth and Quality. It has ranked #3 out of 96 stocks within the China industry.
In addition to the POWR Ratings I’ve just highlighted, you can see LX’s ratings for Momentum and Stability here.
Stock #2: X Financial (XYF)
Headquartered in Shenzhen, China, XYF offers personal finance services. It operates as an online marketplace facilitating connections between borrowers and investors. The company's loan portfolio encompasses Xiaoying card loan; Xiaoying preferred loan to small business owners, and Xiaoying revolving loan.
In terms of trailing-12-month EV/Sales, XYF is trading at 0.19x, 93.5% lower than the 2.83x industry average. The stock’s trailing-12-month EV/EBITDA multiple of 0.58x is 95% lower than the 11.57 industry average. In addition, the stock’s trailing-12-month Price/Sales of 0.35x compares to the 2.16x industry average.
Over the past three years, XYF’s revenue increased at a CAGR of 18.7%. In addition, its total assets grew at an 8.6% CAGR. In addition, the company’s common equity rose at a CAGR of 11.4% over the same time frame.
For the fiscal second quarter that ended on June 30, 2023, XYF’s total net revenue increased 48% year-over-year to $168.30 million. Its income from operations rose 129.4% from the year-ago value to $61.33 million.
Also, the company’s non-GAAP adjusted net income and non-GAAP adjusted net income per share grew 73.2% and 100% from the prior year’s period to $50.32 million and $0.17, respectively.
XYF has gained 29.4% over the past six months and 115.2% over the past year, closing the last trading session at $3.98.
XYF’s solid outlook is apparent in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
XYF has an A grade for Value and a B for Growth, Stability, and Sentiment. It has ranked #2 out of 96 stocks within the same industry.
Click here to access additional XYF ratings for Momentum and Quality.
Stock #1: Tarena International, Inc. (TEDU)
Based in Beijing, China, TEDU delivers professional education services via the Tarena brand, offering full-time and part-time classes. Its segments include IT Professional Education and IT-focused Supplementary STEAM Education Services. The company also manages TMOOC.cn, an online educational and job placement training platform.
On February 27, TEDU unveiled its pioneering collaboration with Baidu Inc.'s (BIDU) ERNIE Bot, marking it as one of the first approved ecosystem partners. This distinction provides TEDU with exclusive access to harness ERNIE Bot's groundbreaking AI technology for innovative applications in professional education.
The partnership could enhance TEDU's course offerings and attract more students, potentially increasing revenue. It may also lead to cost savings through automation and efficiency improvements.
In terms of trailing-12-month EV/Sales, TEDU is trading at 0.06x, 94.5% lower than the 1.09x industry average. Its trailing-12-month EV/EBITDA of 4.40x is 55.9% lower than the 9.97x industry average. Also, the stock’s trailing-12-month Price/Sales of 0.07x is 91.4% lower than the 0.77x industry average.
Over the past three years, TEDU’s revenue increased at a CAGR of 5.8%. Moreover, the company’s revenue rose at a marginal CAGR over the past five years.
TEDU’s net revenues for the second quarter that ended June 30, 2023, came in at $75.16 million. Its gross profit amounted to $38.44 million. Furthermore, the company’s non-GAAP net income and non-GAAP net income per ADS stood at $1.27 million and $0.10, respectively.
Analysts expect TEDU’s revenue to grow 18% year-over-year to $325.76 million for the fiscal 2024. The stock has plunged 1.1% intra-day, closing the last trading session at $1.80.
TEDU’s robust prospects are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
TEDU has an A grade for Growth and a B for Value and Quality. It has topped the 96-stock China industry.
Click here to access the additional TEDU ratings (Momentum, Sentiment, and Stability).
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LX shares were unchanged in premarket trading Friday. Year-to-date, LX has declined -1.55%, versus a 9.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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