The Chinese economy showcased a strong comeback in the first quarter of 2024 with 5.3% growth despite the conflicted real estate industry and slowed domestic consumption rates. The policymakers continue to direct their efforts to strengthen the economy and target the growing sectors.
Given the bright economic backdrop, it could be wise to invest in fundamentally strong China stocks Sunlands Technology Group (STG), China Automotive Systems, Inc. (CAAS), and X Financial (XYF) with significant growth potential.
The struggling real estate sector, a weak job market, and relatively low consumption spending as households lean toward savings reflect continued challenges for policymakers in China.
Despite this, as per the official data, China’s economy grew higher than expected in the first quarter of 2024 at 5.3% compared to a year ago. The GDP grew faster than the 5.2% expansion in the fourth quarter of 2023 and the 4.6% growth expected by economists.
On a quarter-on-quarter basis, the Chinese economy rose 1.6% in the first quarter, compared to economists’ estimate of 1.4% and a revised fourth-quarter growth of 1.2%. Further, China set a growth target of “around 5%” for 2024.
Meanwhile, China's retail sales of consumer goods surged 4.7% year-on-year in the first quarter of 2024. The economy’s retail sales from the urban regions grew 4.6% year-on-year and 5.2% in rural areas over the same period. Service consumption also expanded in the first quarter, contributing 55.7% to the economic growth.
The IMF raised this year's GDP growth outlook for China and the region to 4.5% from the previous 4.2% estimated in October, with China's figure updated by 0.4% point to 4.6%. Also, an official of the IMF stated that the economy’s policies addressing stress in the property sector and boosting domestic demand will help China and the region.
Further, China's services activity continues to expand at a softer rate amid rising costs, with accelerated growth in new orders and a solid rise in business sentiment. In April, the Caixin/S&P Global services purchasing managers' index (PMI) was 52.5 from 52.7 in March.
Considering the encouraging economic trends, let’s delve into the fundamentals of the top three China stocks, beginning with the third choice.
Stock #3: Sunlands Technology Group (STG)
Headquartered in Beijing, STG offers education services through online and mobile platforms. The company provides adult online education and adult personal interest learning education through courses and educational content offerings. It also offers professional assistance and counseling services.
STG’s trailing-12-month EBIT margin and net income margin of 31.25% and 24.65% are 36.6% and 6.5% higher than the respective industry averages of 22.88% and 23.16%. Similarly, the stock’s trailing-12-month ROCE of 22.39% is 112.3% higher than the industry average of 10.55%.
In terms of trailing-12-month EV/EBITDA, STG is trading at 0.30x, 97.2% lower than the industry average of 10.41x. Likewise, the stock’s trailing-12-month Price/Sales multiple of 0.36 is 60.5% lower than the 0.92 industry average. Also, its trailing-12-month EV/Sales of 0.08x is considerably lower than the industry average of 1.25x.
During the fourth quarter that ended December 31, 2023, STG reported net revenues of $76.30 million, and its non-GAAP gross billings were $58.50 million, up 12.1% from the prior year’s quarter. In addition, non-GAAP net income attributable to STG came in at $21.86 million and $3.18 per share, respectively.
Furthermore, the company had $107.90 million in cash, cash equivalents and restricted cash, and $20 million of short-term investments as of December 31, 2023.
Shares of STG have surged 33.9% over the past six months and 30.3% over the past year to close the last trading session at $8.00.
STG’s solid fundamentals 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. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
STG has an A grade for Quality and Value and a B for Sentiment. It is ranked #4 out of 46 stocks in the B-rated China industry.
In addition to the POWR Ratings we’ve stated above, we also have STG ratings for Momentum, Stability, and Growth. Get all STG ratings here.
Stock #2: China Automotive Systems, Inc. (CAAS)
Headquartered in Jingzhou, CAAS manufactures and sells automotive systems and components internationally. The company produces rack and pinion power steering gears for cars and light-duty vehicles, integral power steering gears for heavy-duty vehicles, power steering parts for light-duty vehicles, and sensor modules.
CAAS’ trailing-12-month net income margin of 6.53% is 39.7% higher than the industry average of 4.68%. Similarly, the stock’s trailing-12-month ROCE and ROTA of 11.48% and 4.91% are favorably compared to the respective industry averages of 11.10% and 4.22%.
In terms of trailing-12-month non-GAAP P/E, CAAS is trading at 3.86x, 73.1% lower than the industry average of 14.36x. Also, the stock’s trailing-12-month EV/Sales multiple of 0.10 is 92.4% lower than the 1.25 industry average. Likewise, its trailing-12-month Price/Book of 0.31x is 85.5% lower than the industry average of 2.14x.
For the fourth quarter that ended December 31, 2023, CAAS’ net sales increased 23.6% year-over-year to $159.20 million. Its gross profit grew 38.8% from the year-ago value to $34.70 million. Net income attributable to the company's common shareholders were $10.90 million and $0.36 per share, up 153.5% and 157.1% from the prior year’s quarter, respectively.
In addition, the company’s total assets were $766.44 million as of December 31, 2023, compared to $714.35 million as of December 31, 2022.
CAAS’ stock has gained 4.9% over the past six months to close the last trading session at $3.55.
CAAS’ bright prospects are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
The stock has an A grade for Growth and Value. It also has a B grade for Stability and Sentiment. CAAS is ranked #3 among 46 stocks in the B-rated China industry.
Click here to access CAAS’ ratings for Quality and Momentum.
Stock #1: X Financial (XYF)
Based in Shenzhen, XYF offers personal finance services. It provides services as an online marketplace connecting borrowers and investors. The company’s loan products consist of Xiaoying credit loan, Xiaoying preferred loan, Xiaoying revolving loan, and Xiaoying housing loan. It also offers investment products via Xiaoying wealth management platform.
XYF’s trailing-12-month EBIT margin and net income margin of 31.25% and 24.65% are 36.6% and 6.5% higher than the industry averages of 22.88% and 23.16%, respectively. Similarly, the stock’s trailing-12-month ROCE of 22.39% is 112.3% higher than the industry average of 10.55%.
In terms of trailing-12-month EV/Sales, XYF is trading at 0.15x, 95.4% lower than the industry average of 3.19x. Also, the stock’s trailing-12-month EV/EBITDA multiple of 0.47 is 96% lower than the 11.69 industry average. Further, its trailing-12-month Price/Sales of 0.27x is lower than the industry average of 2.65x.
XYF’s total net revenue increased 24.8% year-over-year to $167.98 million during the fourth quarter that ended December 31, 2023. Its post-origination service fees rose 56.2% year-over-year to $23.49 million. Its non-GAAP adjusted net income came in at $32.51 million, or $0.11 per share for the quarter, respectively.
Furthermore, the company’s cash and cash equivalents were $168.40 million as of December 31, 2023.
XYF’s stock has gained 13.5% over the past year to close the last trading session at $3.82.
XYF’s POWR Ratings reflect this robust outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Value and a B for Sentiment, Growth, and Stability. Within the same industry, XYF is ranked #2 among 46 stocks.
Click here to access additional ratings of XYF for Momentum and Quality.
What To Do Next?
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XYF shares were trading at $3.87 per share on Monday morning, up $0.05 (+1.31%). Year-to-date, XYF has gained 5.74%, versus a 8.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
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