China's solid management of previous economic challenges has been a bulwark of stability. Despite concerns triggered by sluggish growth in the second quarter of 2023, assurances of more vigorous economic stimulants could renew investor confidence in the latter half of the year.
Amid this economic ebb and flow, investing in top-rated Chinese stocks JD.com, Inc. (JD), Alibaba Group Holding Limited (BABA), and Baidu, Inc. (BIDU) could prove rewarding.
Before probing deeper into the fundamentals of these stocks, let us first discuss the factors shaping China's economy.
China, the world's second-largest economy, bounced back following the easing of draconian pandemic restrictions in the first quarter of 2023. However, the much-anticipated post-pandemic revival remains latent as the nation wrestles with various economic issues such as deflation, unprecedented youth unemployment, slowing trade, and an intensifying property crisis.
Amplifying this climate of uncertainty is a towering debt of $10 trillion that notably aggrandized investor concerns. This precarious situation led U.S. President Joe Biden to designate the Asian economy as a "ticking time bomb."
China’s economy grew 0.8% in the second quarter, contrasting with the robust 2.2% gain observed in the first quarter of 2023. According to the National Bureau of Statistics (NBS), China’s 5.5% year-over-year GDP expansion in the first half of 2023 outpaces other major economies with relatively high valuation and quality despite economic challenges.
Following the influx of disappointing data from the country, Morgan Stanley scaled down China’s GDP growth projection to 4.7% this year from its previous estimation of 5%. It has also lowered its 2024 GDP forecast to 4.2% from an earlier projection of 4.5%.
China’s top policymakers are facing mounting pressure to act and stem the faltering growth, which triggered the yuan to plunge to its weakest levels against the U.S. dollar in nine months, prompting overseas investors to offload onshore stocks at an unprecedented pace.
China has been amplifying its initiatives to reinforce the economy. Its latest package of market-boosting measures, such as halving the stamp duty on stocks and slowing the pace of IPOs and divestments by major shareholders, is aimed at reviving investors’ confidence.
While Chinese brokerages Guotai Junan Securities and Soochow Securities believe these measures could enhance risk appetite and uplift stock valuations, Japan-based Nomura Holdings presents a starkly contrasting viewpoint, opining that such initiatives would have minimal impact on the stock market’s rebound.
Investors’ interest in China stocks is apparent from the Invesco Golden Dragon China ETF’s (PGJ) 14.3% returns over the past three months.
Considering these trends, let's take a look at the fundamentals of the three best China industry stocks, beginning with the third choice.
Stock #3: JD.com, Inc. (JD)
Headquartered in Beijing, China, JD provides supply chain-based technologies and services. The JD Retail segment encompasses online retail, marketplace, and Chinese marketing. The New Businesses segment offers third-party logistics, overseas business, tech projects, asset management, and property sales.
On August 16, JD and Gucci announced a digital partnership, launching Gucci’s official flagship store on JD’s platform. The initiative is expected to fortify JD’s appeal among luxury consumers while expanding its customer base through Gucci's esteemed line of apparel and deep-rooted heritage, further solidifying JD's position as a premier e-commerce destination.
JD’s annual dividend of $0.62 yields 1.88% on the current share price. Its four-year average yield is 0.80%.
JD’s revenue has grown at 17.9% and 20.8% CAGRs over the past three and five years, respectively. Moreover, its tangible book value has grown at 10.9% and 31.9% CAGRs over the past three and five years, respectively.
JD’s trailing-12-month cash from operations of $7.24 billion is significantly higher than the industry average of $214.51 million. Likewise, its trailing-12-month asset turnover ratio of 1.85x is 83.3% higher than the industry average of 1.01x.
During the second quarter that ended June 30, 2023, JD’s total net revenues increased 7.6% year-over-year to $39.71 billion, while its total operating income stood at $1.14 billion, up 120.1% from the prior-year quarter. Its non-GAAP EBITDA grew 45% from the year-ago value to $1.43 billion.
Also, non-GAAP net income attributable to the company’s ordinary shareholders rose 31.9% year-over-year to $1.18 billion, while non-GAAP net income per share came in at $0.37, up 33% from the prior-year quarter.
The consensus revenue estimate of $151.15 billion for the fiscal year ending December 2023 reflects a marginal year-over-year improvement. Likewise, EPS for the same period is expected to grow 15.4% from the previous year to $2.94. Also, the company surpassed the consensus EPS estimates in all trailing four quarters.
Shares of JD gained 2% intraday, closing the last trading session at $34.50. Over the past month, the stock gained 4.2%.
JD’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
JD has an A grade for Growth and a B for Sentiment. It is ranked #17 out of 45 stocks within the B-rated China industry.
Click here to access additional JD ratings (Value, Stability, Quality, and Momentum).
Stock #2: Alibaba Group Holding Limited (BABA)
Headquartered in Hangzhou, China, BABA is a leading technology company specializing in e-commerce, retail, Internet, and technology. The company operates through seven segments: China Commerce; International Commerce; Local Customer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others.
During the quarter that ended June 30, 2023, BABA repurchased 35.6 million ADSs (the equivalent of 284.4 million ordinary shares) for $3.1 billion under its share repurchase program. As of June 30, 2023, the company had 20.4 billion ordinary shares (the equivalent of 2.5 billion ADSs) outstanding, and $16.3 billion remained under the current share buyback program authorized by the Board, effective through March 2025.
During the quarter, BABA announced a series of new features for its generative AI model. After unveiling Tongyi Qianwen in April 2023, Alibaba Cloud upgraded its audio transcription platform Tingwu with AI-powered meeting analysis capability. In July, Alibaba Cloud launched its generative AI text-to-image model Tongyi Wanxiang.
BABA’s revenue has grown at 17.8% and 26.1% CAGRs over the past three and five years, respectively. Moreover, its tangible book value has grown at 14% and 39.3% CAGRs over the past three and five years, respectively.
BABA’s trailing-12-month cash from operations of $29.11 billion is significantly higher than the industry average of $214.51 million. Likewise, its trailing-12-month net income and levered FCF margins of 9.40% and 11.66% are 119% and 134.7% higher than the industry averages of 4.29% and 4.97%, respectively.
For the fiscal first quarter that ended June 30, 2023, BABA’s revenue increased 13.9% year-over-year to $32.29 billion, while its income from operations rose 70.3% from the prior-year quarter to $5.86 billion. Its adjusted EBITDA grew 26.6% from the year-ago quarter to $7.18 billion. The company’s non-GAAP net income and non-GAAP EPS rose 48.5% and 47.6% year-over-year to $6.20 billion and $0.30, respectively.
Analysts expect BABA’s revenue and EPS for the fiscal second quarter (ending September 2023) to increase 8% and 14.6% year-over-year to $31.26 billion and $2.07, respectively. The company has surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past three months, the stock has gained 16.1% to close the last trading session at $94.03. The stock has gained 1.9% intraday.
BABA’s POWR Ratings reflect a robust outlook. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has an A grade for Growth and a B for Sentiment and Quality. It is ranked #6 within the same industry.
Click here to see BABA’s additional ratings for Value, Momentum, and Stability.
Stock #1: Baidu, Inc. (BIDU)
With its Headquarters in Beijing, BIDU operates as a Chinese language Internet search provider. Its Baidu.com platform enables users to discover online information. The company operates through two segments, Baidu Core and iQIYI.
On August 25, BIDU announced the expansion of Apollo Go, its autonomous ride-hailing platform, to expand its driverless car service to cover Wuhan Tianhe International Airport. This marks the first time in China that an autonomous ride-hailing service has been established between urban areas and an airport and the first instance of Chinese autonomous vehicles connecting both urban roads and highways. The service will be made available to the general public in September.
Over the past three years, BIDU’s revenue and total assets have grown at CAGRs of 7.4% and 10.1%, respectively. The company’s tangible book value has increased at CAGRs of 14.1% and 10.2% over the past three and five years, respectively.
BIDU’s trailing-12-month levered FCF margin of 21.12% is 163.8% higher than the industry average of 8.01%. Its trailing-12-month cash from operations of $4.56 billion is significantly higher than the industry average of $254.23 million.
For the fiscal second quarter that ended June 30, 2023, BIDU’s total revenues increased 14.9% year-over-year to $4.70 billion, while its non-GAAP operating income increased 33.5% year-over-year to $1.01 billion.
Its adjusted EBITDA grew 29.2% from the year-ago value to $1.26 billion. Also, non-GAAP net income to BIDU and non-GAAP earnings per ADS stood at $1.10 billion and $3.11, up 44.3% and 42.8% from the previous year’s quarter.
Analysts expect BIDU’s revenue and EPS to increase 6% and 4.3% year-over-year to $4.83 billion and $2.46, respectively, for the fiscal quarter ending September 2023. Furthermore, the company topped the consensus revenue and EPS estimates in all trailing four quarters, which is impressive.
The stock has gained 2.5% intraday to close the last trading session at $140.71. Over the past three months, it gained 11.6%.
BIDU’s strong fundamentals are reflected in its POWR Ratings. It has an overall grade of B, translating to a Buy in our proprietary rating system.
BIDU has an A grade for Sentiment and a B for Growth and Value. It is ranked #4 within the same industry.
To access additional BIDU ratings for Momentum, Stability, and Quality, click here.
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BABA shares fell $1.53 (-1.63%) in premarket trading Wednesday. Year-to-date, BABA has gained 5.18%, versus a 18.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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