China has since late 2020 intensified its regulatory crackdown on various industries, from technology to finance gaming and education, wiping hundreds of millions off the market capitalizations of some of the nation’s largest companies. Moreover, China’s crackdown widens as another consulting firm Capvision is recently raided over national security concerns.
Despite the latest economic data suggesting China’s economic rebound, intensified regulatory crackdown puts immense pressure on stocks. Amid this backdrop, investors could consider avoiding fundamentally weak Chinese stocks Air China Limited (AIRYY), Bilibili Inc. (BILI), and Tuniu Corporation (TOUR) in May.
In late 2020, the Chinese Communist Party (CCP) and several Chinese regulatory bodies under CCP General Secretary Xi Jinping initiated a regulatory spree, strengthening its regulatory system, issuing fines, and modifying existing laws or introducing new ones. Regulators primarily targeted at disrupting the growth of monopolistic tech companies.
Regulatory actions by the Chinese government included implementing restrictions on education companies, imposing strict limits on minors playing online video games, and introducing several anti-monopoly and data security rules. Notably, Chinese tech giant Alibaba faced multiple fines for failure to comply with anti-monopoly transaction disclosure laws.
Even after two years, China’s regulatory crackdown is not likely to end any time soon. Capvision Partners is the latest consultancy and due diligence company to get caught in Beijing’s sweeping crackdown over concerns of national security.
According to state broadcaster CCTV, Capvison had accepted projects from foreign companies to source information, including “state secrets and intelligence” on extremely sensitive sectors such as defense and advanced technology.
Despite recent economic data indicating that the world’s second-largest economy is recovering following a three-year rout, Chinese stocks are certainly feeling the weight of the country’s regulatory crackdown.
Against the backdrop, Chinese stocks AIRYY, BILI, and TOUR, with financial weakness and bleak growth outlook, are best avoided this month.
Let’s discuss the fundamentals of these stocks in detail:
Air China Limited (AIRYY)
Headquartered in Beijing, China, AIRYY offers air passenger, air cargo, and airline-related services in Mainland China, Hong Kong, Macau, Taiwan, Europe, North America, Korea, the Asia Pacific, and internationally. The company operates through Airline Operations and Other Operations segments.
AIRYY’s trailing-12-month gross profit margin of negative 37.51% is lower than the 30.01% industry average. Likewise, its trailing-12-month EBITDA margin of negative 33.99% compares to the industry average of 13.18%. In addition, the stock’s trailing-12-month net income margin of 50.19% is significantly lower than the 6.42% industry average.
In terms of forward EV/Sales, AIRYY is currently trading at 2.60x, 65.6% higher than the 1.57x industry average. Also, the stock’s forward EV/EBIT multiple of 63.84 is 339.1% higher than the industry average of 14.54.
For the first quarter that ended March 31, 2023, AIRYY’s total operating cost increased 28.5% year-over-year to RMB29.75 billion ($4.30 billion). The company reported a loss from operations and a net loss of RMB3.29 billion ($475.23 million) and RMB3.27 billion ($472.34 million), respectively. In addition, its earnings per share came in at RMB0.19 for the quarter.
Shares of AIRYY have declined 5.9% over the past month and 7.6% year-to-date to close the last trading session at $17.19.
AIRYY’s POWR Ratings reflect its bleak prospects. The stock has an overall rating of D, which translates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
AIRYY has an F grade for Value and a D for Quality. The stock is ranked #35 of 46 in the China industry.
Click here for additional POWR Ratings of AIRYY’s Growth, Stability, Momentum, and Sentiment.
Bilibili Inc. (BILI)
Based in Shanghai, China, BILI provides online entertainment services for the young generations. The company’s platform offers a wide range of content, including video services, mobile games and value-added services, and ACG-related comic and audio content. Its video services include professional user-generated videos, occupationally generated videos, and live broadcasting.
BILI’s trailing-12-month gross profit margin of 17.58% is 65% lower than the industry average of 50.16%. In addition, the stock’s trailing-12-month EBITDA and net income margins of negative 21.37% and 34.23% compare to the respective industry averages of 17.78% and 3.12%.
BILI’s forward EV/Sales of 2.07x is 15.6% higher than the 1.79x industry average. Also, its forward Price/Sales of 2.21x is 90.6% higher than the industry average of 1.16x, while the stock’s forward Price/Book multiple of 4.44 is 1.84% higher than the industry average of 1.84.
During the fourth quarter that ended December 31, 2022, BILI’s revenues from mobile games and advertising decreased 12% and 6.3% year-over-year to $166.10 million and $219.30 million. Its total operating expenses were $518.60 million, an increase of 15% from the same period in 2021. The company’s loss from operations widened by 15% from the year-ago value to $337.40 million.
Furthermore, the company reported an adjusted net loss and adjusted net loss per share of $190.60 million and $0.48, respectively.
Analysts expect BILI to report a loss per share of $1.66 and $0.74 for the fiscal years 2023 and 2024, respectively. Moreover, the company has missed the consensus EPS estimates in three of the trailing four quarters, which is disappointing.
The stock has declined 7.4% over the past month to close the last trading session at $19.41.
BILI’s POWR Ratings reflect this weak outlook. It has an overall rating of D, translating to a Sell in our proprietary rating system.
The stock has a D grade for Stability, Quality, Sentiment, and Momentum. It is ranked #44 out of 46 stocks in the China industry.
Beyond what has been stated above, we’ve also given BILI grades for Value and Growth. Get all BILI ratings here.
Tuniu Corporation (TOUR)
TOUR operates as an online leisure travel company in China. The company provides several packaged tours, such as organized and self-guided tours; other travel-related services, including tourist attraction tickets, visa application services, financial services, and hotel booking services. Also, it offers car rental and insurance services. TOUR is headquartered in Nanjing, China.
TOUR’s trailing-12-month EBIT margin of negative 55.09% is lower than the industry average of 7.44%. And its trailing-12-month net income margin of negative 45.09% compares to the industry average of 11.08%. Also, the stock’s trailing-12-month levered FCF margin of negative 22.34% compares to the 2.95% industry average.
In terms of trailing-12-month EV/Sales, TOUR is currently trading at 4.21x, 273.9% higher than the 1.13x industry average. Likewise, its trailing-12-month Price/Sales multiple of 7.85 is 822.2% higher than the industry average of 0.85.
TOUR’s net revenues declined 62.8% year-over-year to $4 million for the fourth quarter that ended December 31, 2022. This decrease was primarily due to the negative impact of the outbreak and the spread of COVID-19. Non-GAAP loss from operations was $7.30 million in the fourth quarter of 2022. Also, non-GAAP net loss attributable to ordinary shares came in at $5 million.
TOUR’s stock has slumped 9.1% over the past month and 12.4% year-to-date to close the last trading session at $1.69.
TOUR’s POWR Ratings are consistent with its bleak fundamentals. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.
TOUR has a D for Value and Stability. The stock is ranked #36 in the same industry.
Click here to access additional ratings for TOUR’s Growth, Momentum, and Sentiment.
The Bear Market is NOT Over…
That is why you need to discover this timely presentation with a trading plan and top picks from 40 year investment veteran Steve Reitmeister:
REVISED: 2023 Stock Market Outlook >
AIRYY shares were unchanged in premarket trading Wednesday. Year-to-date, AIRYY has declined -7.58%, versus a 8.72% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
China Crackdown: 3 Stocks Worth Avoiding in May StockNews.com
