Despite encountering several macroeconomic challenges, the Chinese economy's performance in the third quarter, surpassing expectations, indicates the efficacy of the implemented policy measures aimed at revitalizing economic growth.
Given the optimism, three fundamentally sound Chinese stocks, Alibaba Group Holding Limited (BABA), Weibo Corporation (WB), and Autohome Inc. (ATHM), could be solid portfolio additions this month.
The third-quarter economic growth in China exceeded expectations, fostering optimism that the world's second-largest economy could meet or even exceed Beijing's target of around 5% for the current year.
According to the National Bureau of Statistics, China recorded a 4.9% growth in the July to September quarter compared to the same period a year earlier, surpassing economist expectations of 4.6% GDP growth. Moreover, the unemployment rate exhibited improvement, dropping to 5% in September from the preceding month's 5.2%.
This rosier-than-expected economic performance of China has prompted multiple adjustments for the current year's GDP growth forecasts. Citigroup, for instance, has raised its projection to 5.3%, up from the previous estimate of 5%. Meanwhile, JP Morgan and Nomura anticipate growth rates of 5.2% and 5.1%, respectively.
On the other hand, Goldman Sachs has revised its forecast slightly downward to 5.3% from 5.4%, although it remains higher than Beijing's official target of 5% growth for the year. In addition, JP Morgan anticipates that the economic momentum will continue in the upcoming months for China.
Furthermore, the International Monetary Fund (IMF) has revised China's GDP growth projections, now anticipating a 5.4% expansion for the current year, up from the earlier estimate of 5%.
Looking ahead to the next year, the IMF projects a 4.6% growth, an increase from the October forecast of 4.2%. These positive adjustments are attributed to China's approval of a CN¥1 trillion ($139.98 billion) sovereign bond issue and the implementation of measures to reinforce the economy.
The given GDP forecasts emphasize a positive sentiment for the Chinese economy. Therefore, in light of the scenario, investors might find it advantageous to adopt a bullish stance on BABA, WB, and ATHM.
With that being said, let us now dig deeper into the fundamentals of these China stocks, beginning with number three.
Stock #3: Alibaba Group Holding Limited (BABA)
Based in Hangzhou, China, BABA provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses engage with their users and customers. The company operates through seven segments: China Commerce; International Commerce; Local Consumer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others.
On October 31, BABA partnered with the World Baseball Softball Confederation (WBSC), the overseeing body for baseball and softball worldwide, to promote sustainability in global baseball competitions.
Through its AI-powered sustainability platform and energy experts, BABA aims to assist the WBSC in optimizing event operations. This includes the implementation of various forms of renewable energy and the reduction of power consumption during venue construction in the lead-up to the games.
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, Nevada, 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.
The stock’s trailing-12-month net income margin of 14.50% is 220.7% higher than the 4.52% industry average. Its trailing-12-month levered FCF margin of 14.17% is 173.7% higher than the industry average of 5.18%. Furthermore, BABA’s trailing-12-month EBIT margin of 14.66% is 96.4% higher than the 7.87% industry average.
For the fiscal second quarter that ended September 30, 2023, BABA’s revenue increased 8.5% year-over-year to $30.81 billion, while its income from operations came in at $4.60 billion, up 33.6% from the year-ago value.
Moreover, the company’s non-GAAP net income and non-GAAP EPS increased 18.8% and 21.1% year-over-year to $5.51 billion and $0.27, respectively. Also, its adjusted EBITDA grew 13.7% from the prior-year quarter to $6.75 billion.
Street expects BABA’s revenue and EPS for the fiscal period ending March 2024 to increase 8.2% and 16.7% year-over-year to $133.62 billion and $9.05, respectively. Additionally, the company surpassed its EPS estimates in each of the trailing four quarters, which is promising.
BABA’s shares gained marginally intraday to close the last trading session at $72.33.
BABA’s POWR Ratings reflect this promising 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 a B grade for Quality. In the 41-stock A-rated China industry, it is ranked #17. Click here to see BABA’s ratings for Growth, Value, Momentum, Stability, and Sentiment.
Stock #2: Weibo Corporation (WB)
Headquartered in Beijing, WB operates as a social media platform for people to create, distribute, and discover content in China. It operates in two segments: Advertising and Marketing Services; and Value-Added Services.
The stock’s trailing-12-month net income margin of 23.01% is 616.1% higher than the 3.21% industry average. Its trailing-12-month levered FCF margin of 26.79% is 250.1% higher than the industry average of 7.65%. Furthermore, WB’s trailing-12-month EBIT margin of 29.49% is 274.9% higher than the 7.87% industry average.
For the fiscal third quarter, which ended on September 30, 2023, WB’s net revenues amounted to $440.24 million, while its income from operations rose 8.7% from the year-ago value to $133.99 million. Furthermore, the company’s net income amounted to $84.17 million and $0.34 per share compared to a net loss of $16.91 million and $0.07 per share in the same period last year.
Analysts predict WB’s revenue for the fourth quarter (ending December 2023) to increase 1.9% year-over-year to $456.49 million, while its EPS for the same period is expected to be $0.53. Moreover, the company has an excellent earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.
The stock gained marginally intraday to close the last trading session at $9.64.
WB’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has an A grade for Value and a B for Quality. Within the same A-rated industry, it is ranked #14. Click here to see the other ratings of WB for Growth, Momentum, Stability, and Sentiment.
Stock #1: Autohome Inc. (ATHM)
ATHM operates as an online destination for automobile consumers. The company delivers interactive content and tools to automobile consumers through its three websites, autohome.com.cn, che168.com, and ttpai.cn on PCs, mobile devices, mobile applications, and mini apps.
ATHM’s trailing-12-month net income margin of 29.07% is 804.9% higher than the 3.21% industry average. Its trailing-12-month levered FCF margin of 23.24% is 203.7% higher than the industry average of 7.65%. Furthermore, the stock’s trailing-12-month EBIT margin of 17.92% is 127.8% higher than the 7.87% industry average.
In the fiscal third quarter, which ended on September 30, 2023, ATHM’s total net revenues increased 3.4% year-over-year to $261.24 million, while its gross profit rose 1.3% from the prior-year quarter to $210.04 million.
The company’s net income and EPS amounted to $78.69 million and $0.16, up 12.7% and 16.2% from the year-ago value, respectively. In addition, its adjusted EBITDA improved 22.4% year-over-year to $74.03 million.
For the fourth quarter (ending December 2023), ATHM’s revenue and EPS are expected to come in at $262.57 million and $0.59, respectively. Moreover, the company topped its revenue and EPS estimates in each of the trailing four quarters, which is impressive.
ATHM’s shares have surged marginally over the past month to close the last trading session at $26.47.
It’s no surprise that ATHM has an overall rating of B, which equates to Buy in our proprietary rating system. It has a grade of B for Value and Quality. In the same industry, it is ranked #11.
In addition to the POWR Ratings we’ve stated above, we also have ATHM’s ratings for Growth, Momentum, Stability, and Sentiment. Get all ATHM ratings here.
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BABA shares were trading at $72.07 per share on Friday afternoon, down $0.26 (-0.36%). Year-to-date, BABA has declined -18.19%, versus a 21.34% 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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