Despite struggling with declining trade and foreign investment, a volatile housing market, and deflation, China remains one of the world's largest and fastest-growing economies. Additionally, the prospect of robust economic stimulus measures introduced by policymakers could rekindle investor confidence in the year's second half.
Given the optimism, it could be an opportune time to scoop up shares of four fundamentally sound China stocks Alibaba Group Holding Limited (BABA), Baidu, Inc. (BIDU), China Automotive Systems, Inc. (CAAS), and Tarena International, Inc. (TEDU) for potential gains.
Before we dive into the fundamentals of the highlighted stocks, let us briefly examine the prevailing economic landscape of China.
China, the world’s second-largest economy, experienced a year-on-year expansion of 6.3% in the second quarter of 2023, compared to the 4.5% recorded in the first quarter. Moreover, as per the National Bureau of Statistics, China's 5.5% year-over-year GDP expansion in the first half of 2023 surpasses other major economies with relatively high valuation and quality despite economic challenges.
Additionally, consumer spending in China rebounded strongly in August following a lackluster July, as the China Beige Book's survey of Chinese businesses reported. In July, retail sales had only seen a modest 2.5% year-on-year increase, raising concerns about China's economic growth.
However, on a year-to-date basis, retail sales from services had surged by an impressive 20.3%. This data underscores the sustained strength of the services sector's "revenge spending" trend.
On top of it, Chinese policymakers, including top government bodies like the State Council, have recently launched a series of carefully designed stimulus measures. These measures have a dual purpose to boost domestic consumption and revitalize economic growth, not only for China's benefit but also as a response to global economic challenges.
For instance, these measures promote consumption in areas like automobiles and electronics and align with China's push for high-quality growth in AI technology. These heavy-weight guidelines have also helped the private sector gain confidence in the domestic market.
Given the nation's determined efforts to improve its economic outlook, it might be prudent to consider adding Chinese stocks BABA, BIDU, CAAS, and TEDU to your portfolio. To that end, let us dig deeper into the fundamentals of these China stocks, beginning with number four.
Stock #4: Alibaba Group Holding Limited (BABA)
Based in Hangzhou, China, BABA provides merchants, brands, and businesses with technology and marketing prowess. It operates through seven segments: China Commerce; International Commerce; Local Consumer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others.
On September 7, BABA introduced a range of new products and improvements to its existing sourcing tools at its inaugural Co-Create conference that took place from September 7 to 8 in Las Vegas, NV, which featured innovative products, interactive learning opportunities for entrepreneurs, and over 50 sessions with industry-leading experts.
These new products aim to empower entrepreneurs to enhance their sourcing and supply chain operations in the highly competitive landscape of small businesses.
On May 25, Alibaba Cloud, BABA's digital technology, and MongoDB, Inc. (MDB) announced a four-year extension of their strategic global partnership, which has experienced substantial growth since its inception in 2019.
By integrating the MDB database with Alibaba Cloud's unique capabilities, Alibaba Group's clients can accelerate their innovation and business scalability. This collaboration, powered by ApsaraDB for MDB, efficiently optimizes costs and boosts productivity. As a result, BABA could see an improved customer experience.
BABA’s trailing-12-month EBIT margin of 14.01% is 92.5% higher than the industry average of 7.28%. Its trailing-12-month levered FCF margin of 11.66% is 128.9% higher than the industry average of 5.09%. Furthermore, the stock’s trailing-12-month cash per share of $12.24 is 406.9% higher than the industry average of $2.41.
For the first quarter that ended June 30, 2023, BABA’s revenue increased 13.9% year-over-year to $32.29 billion. Its adjusted EBITDA grew 26.6% from the year-ago value to $7.18 billion. Also, 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.
The consensus revenue estimate of $32.21 billion for the third quarter (ending September 2023) represents a 7.8% increase year-over-year. The consensus EPS estimate of $2.09 for the ongoing quarter indicates a 15.8% improvement year-over-year. Moreover, the company has an excellent earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.
Over the past three months, the stock has gained 4.5% to close the last trading session at $90.05.
BABA’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and a B for Sentiment and Quality. In the 45-stock B-rated China industry, it is ranked #9. Click here to see BABA’s ratings for Value, Momentum, and Stability.
Stock #3: 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 extension of its autonomous ride-hailing platform, Apollo Go, to include Wuhan Tianhe International Airport. This milestone represents the first instance in China where an autonomous ride-hailing service connects urban areas with an airport. It also marks the first time Chinese autonomous vehicles traverse both city streets and highways.
Additionally, this development underscores BIDU’s ability to overcome intricate operational obstacles for its robotaxi fleet, paving the way for greater accessibility of autonomous ride-hailing services to the general public.
On July 16, BIDU secured the necessary licenses to operate its fully autonomous ride-hailing service in Shenzhen commercially. This means that BIDU's robotaxis are now permitted to offer ride-hailing services without a safety operator in the vehicle, marking Shenzhen as the fourth Chinese city to embrace this innovative service.
This strategic expansion significantly broadens the coverage of BIDU’s fully autonomous nationwide ride-hailing service, laying the groundwork for potential expansion to serve paying customers across China. These forward-looking expansions are expected to drive the company's growth prospects.
BIDU’s trailing-12-month EBIT margin of 15.88% is 86.1% higher than the industry average of 8.53%. Its trailing-12-month net income margin of 12.11% is 193.3% higher than the industry average of 4.1%. Furthermore, the stock’s trailing-12-month cash per share of $16.54 is significantly higher than the industry average of $1.48.
For the second quarter that ended June 30, 2023, BIDU’s total revenues increased 14.9% year-over-year to $4.69 billion, while its non-GAAP operating income rose 33.5% from the year-ago value to $1.01 billion.
In addition, the company’s non-GAAP net income and non-GAAP earnings per ADS stood at $1.10 billion and $3.11, up 44.3% and 42.8% from the prior-year quarter, respectively. Also, its adjusted EBITDA grew 29.2% from the year-ago value to $1.26 billion.
Street expects BIDU’s revenue and EPS for the fiscal third quarter (ending September 2023) to increase 6.4% and 4.1% year-over-year to $4.85 billion and $2.46, respectively. Moreover, the company topped its revenue and EPS estimates in each of the trailing four quarters.
BIDU’s shares have gained 12.8% over the past nine months and 18.6% year-to-date to close the last trading session at $135.67.
BIDU’s POWR Ratings reflect this solid outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Growth and Value. In the same B-rated industry, it is ranked #6. To see additional POWR Ratings of BIDU for Momentum, Stability, and Quality, click here.
Stock #2: China Automotive Systems, Inc. (CAAS)
Headquartered in Jingzhou, China, CAAS manufactures and sells automotive systems and components in China and worldwide. The company’s product portfolio includes rack and pinion power steering gears for cars and light-duty vehicles, integral power steering gears, sensor modules, automobile steering systems and columns, etc.
CAAS’ trailing-12-month ROTA of 4.25% is 9.2% higher than the 3.22% industry average. Its trailing-12-month net income margin of 5.33% is 23.9% higher than the 4.30% industry average. Additionally, the stock’s trailing-12-month cash per share of $3.17 is 31.2% higher than the industry average of $2.41.
For the fiscal second quarter, which ended on June 30, 2023, CAAS’ net product sales increased 8.1% year-over-year to $137.41 million, while its gross profit rose marginally from the year-ago value to $22.72 million.
The company’s net income and EPS increased 15.4% and 12.9% from the prior-year quarter to $11.47 million and $0.35, respectively. Moreover, its income from operations improved 8.2% year-over-year to $7.79 million.
CAAS’ EPS is projected to improve by 10% annually over the next five years. Furthermore, the company surpassed its EPS estimates in each of the trailing four quarters, which is promising.
The stock lost marginally over the past year to close the last trading session at $4.
CAAS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Value and a B for Growth, Stability, and Sentiment. Within the same industry, it is ranked #4. Click here to see the other ratings of CAAS for Momentum and Quality.
Stock #1: Tarena International, Inc. (TEDU)
Headquartered in Beijing, TEDU provides professional education services through full-time and part-time classes under the Tarena brand in China. It operates through two segments: IT Professional Education and IT-focused Supplementary STEAM Education Services.
On February 27, TEDU announced that it had become one of the initial authorized ecosystem partners of Baidu, Inc.'s generative AI chatbot, ERNIE Bot. As a part of the ecosystem, TEDU gains preferential access to ERNIE Bot for exploring its potential applications in various educational contexts.
This marks a groundbreaking use of the conversational language model in professional education, with the aim of not only equipping TEDU students for lucrative roles in the digital economy but also contributing to the further development of generative AI technology in the education sector. This strategic move is poised to bring significant advantages to the company.
The stock’s trailing-12-month gross profit margin of 54.39% is 53.4% higher than the industry average of 35.4%. Its trailing-12-month asset turnover of 1.57x is 57.6% higher than the industry average of 1.00x. Furthermore, TEDU’s trailing-12-month cash per share of $3.58 is 48.5% higher than the industry average of $2.41.
For the fiscal second quarter that ended on June 30, 2023, TEDU’s net revenues amounted to $75.16 million, while its gross profit came in at $38.44 million. During the same period, the company’s net income and EPS stood at $1.16 million and $0.70, respectively. Also, its cash and cash equivalents amounted to $38.62 million.
The stock lost marginally intraday to close the last trading session at $2.17.
Unsurprisingly, TEDU has an overall rating of A, equating to a Strong Buy in our proprietary rating system. It has an A grade for Growth and a B for Value and Quality. Out of 42 stocks in the same industry, it is ranked first.
In addition to the POWR Ratings we’ve stated above, we also have TEDU’s ratings for Momentum, Stability, and Sentiment. Get all TEDU ratings here.
What To Do Next?
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BABA shares were trading at $88.68 per share on Monday afternoon, down $1.37 (-1.52%). Year-to-date, BABA has gained 0.67%, versus a 17.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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