The Chinese stock market’s troubles over the past few years are well-known. However, the Chinese government is undertaking several corrective measures to not only boost its economy but also to stabilize its struggling stock market.
Amid this backdrop, investors could consider buying fundamentally strong Chinese stocks Xunlei Limited (XNET), Youdao, Inc. (DAO), and Tuniu Corporation (TOUR).
Before diving deeper into the fundamentals of these Chinese stocks, let’s discuss what’s taking place in China’s stock market and which factors are expected to shape its prospects.
The past few years have been difficult for the Chinese stock market as about $6 trillion has been wiped off the value of Chinese and Hong Kong stocks. The Shanghai Composite Index has declined 8% over the past year, and the Hang Seng Index has fallen 16.4% during the same period. The MSCI Emerging Markets rose 10.3% last year, compared to the MSCI China Index decline of 11%.
The downfall of Chinese stocks over the past few years has been due to factors like subdued consumption, frequent lockdowns to prevent the spread of Covid, a real estate downturn, deflation, record youth unemployment, declining birth rates, and policies that led to a crackdown on private enterprises and Big Tech.
However, the Shanghai Composite Index has recently climbed above the 3,000 mark due to renewed investor optimism following the corrective steps taken by the government and relevant authorities to shore up the economy and the stock market. In a cabinet meeting led by Premier Li Qiang, officials were urged to ramp up medium and long-term fund injections in the capital market to bolster market confidence.
Also, China’s securities regulators have curbed short-selling in its stock index futures market and have restricted net selling by mutual fund managers in an effort to stabilize the stock market. This has led to a significant reduction in the volume of shorted stocks, reaching the lowest levels in more than three years.
Furthermore, Chinese policymakers have been reported to be considering injecting about 2 trillion yuan ($278.03 billion) to stabilize its stock market by using the offshore accounts of Chinese state-owned enterprises. They have also put aside ¥300 billion ($41.70 billion) of local funds that would be utilized to invest in onshore shares through state-owned financial firms China Securities Finance Corp. or Central Huijin Investment Ltd.
The People’s Bank of China (PBoC) cut the reserve requirement ratio by 50 basis points on February 5, helping aid liquidity in the economy. The reduction would provide one trillion yuan ($140.96 billion) in long-term liquidity, spurring economic growth. Also, the PBOC announced a record cut to a critical mortgage reference rate in order to support its ailing property sector.
The central bank would cut its five-year loan prime rate (LPR) from 4.2% to 3.95%, providing a boost to economic activity in the nation. Financial News said, “Lowering the five-year LPR will help stabilize confidence, promote investment and consumption, and also help support the stable and healthy developments of the real estate market.”
Furthermore, the PBoC kept the rate on ¥500 billion ($69.51 billion) worth of one-year medium-term lending facility (MLF) unchanged at 2.50%, in line with economists’ expectations. Investors were also rejoicing at the release of recent economic data, which showed that more than 61 million rail journeys were undertaken during the week-long Lunar New Year break, a 61% increase over the prior year and the most in five years.
Domestic tourism showed signs of solid recovery as spending rose 47.3% year-over-year to ¥632.70 billion ($87.96 billion). Also, nearly 474 million tourist trips were made during the Lunar New Year break, a 34.3% rise year-over-year. More recently, the Chinese securities regulators have prohibited major institutional investors from reducing equity holdings at the open and close during trading days.
Considering this favorable backdrop, let’s assess the fundamentals of the three best China stock picks, beginning with the third choice.
Stock #3: Xunlei Limited (XNET)
Based in Shenzhen, XNET operates an Internet platform for digital media content in China. Its platform is based on cloud technology that enables users to access, store, manage, and consume digital media content.
In terms of trailing-12-month GAAP P/E, XNET’s 8.01x is 72.6% lower than the 29.18x industry average. Its 0.25x trailing-12-month Price/Sales is 91.3% lower than the 2.93x industry average.
XNET’s revenues, net of rebates and discounts, for the third quarter ended September 30, 2023, came in at $84.24 million. Its gross profit rose 6.6% year-over-year to $37.54 million. The company’s non-GAAP net income stood at $5.47 million. Also, its non-GAAP earnings per ADS came in at $0.0835.
Over the past month, the stock has declined 1.3% to close the last trading session at $1.49.
XNET’s POWR Ratings reflect solid prospects. It has an overall rating of B, equating 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.
It is ranked #15 out of 41 stocks in the China industry. It has an A grade for Value and a B for Sentiment. Click here to see XNET's additional ratings for Growth, Momentum, Stability, and Quality.
Stock #2: Youdao, Inc. (DAO)
Headquartered in Hangzhou, China, DAO is an internet technology company that provides online services in the field of content, community, communication, and commerce in China. It operates through three segments: Learning Services, Smart Devices, and Online Marketing Services. It offers online knowledge tools, learning services, STEAM courses, smart devices, education digitalization, and online marketing services.
In terms of forward EV/Sales, DAO’s 0.90x is 27.7% lower than the 1.25x industry average. Its 0.68x forward Price/Sales is 26.1% lower than the 0.91x industry average.
For the fiscal third quarter ended September 30, 2023, DAO’s total net revenues rose 9.7% year-over-year to RMB1.54 billion ($214.08 million). Its gross profit increased 13.1% over the prior-year quarter to RMB859.64 million ($119.50 million). The company’s total gross margin stood at 55.9%, compared to 54.2% in the prior year quarter.
Also, its non-GAAP net loss from continuing operations attributable to ordinary shareholders of the company narrowed 59.1% year-over-year to RMB67.25 million ($9.35 million). Also, its non-GAAP net loss from continuing operations per ADS narrowed 58.6% year-over-year to RMB0.55.
Analysts expect DAO’s revenue for the quarter ending March 31, 2024, to increase 13% year-over-year to $185.81 million. Over the past month, the stock has gained 30.8% to close the last trading session at $4.08.
DAO’s POWR Ratings reflect this positive outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It is ranked #11 in the same industry. It has a B grade for Growth and Value. To see the additional ratings of DAO for Momentum, Stability, Sentiment, and Quality, click here.
Stock #1: Tuniu Corporation (TOUR)
Headquartered in Nanjing, the People’s Republic of China, TOUR operates as an online leisure travel company. The company offers various packaged tours, including organized and self-guided tours, and other travel-related services, such as tourist attraction tickets, visa application services, accommodation reservations, financial services, and hotel booking services, as well as air, train, and bus ticketing for leisure travelers.
In terms of forward Price/Book, TOUR’s 0.53x is 79.5% lower than the 2.60x industry average. Its 17.55x forward GAAP P/E is 4.5% lower than the 16.80x industry average.
TOUR’s net revenues for the quarter ended September 30, 2023, increased 128.9% year-over-year to RMB178.19 million ($24.77 million). Its gross profit rose 154.9% over the prior-year quarter to RMB114.77 million ($15.96 million).
The company’s non-GAAP net income attributable to ordinary shareholders stood at RMB45.79 million ($6.37 million), compared to its non-GAAP net loss attributable to ordinary shareholders of RMB20.12 million ($2.80 million) in the prior-year quarter.
For fiscal 2025, TOUR’s EPS and revenue are expected to increase 92.9% and 40.3% year-over-year to $0.08 and $84.97 million, respectively. Over the past month, the stock has gained 9.3% to close the last trading session at $0.69.
TOUR’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #6 in the China industry. It has an A grade for Sentiment and a B for Growth, Value, and Quality. Click here to see the other ratings of TOUR for Momentum and Stability.
What To Do Next?
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DAO shares were unchanged in premarket trading Friday. Year-to-date, DAO has gained 3.55%, versus a 7.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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