Amid a new batch of stimulus measures and the latest economic data showing a pick up in retail sales and industrial production, China’s economy shows signs of recovery. Against this backdrop, it could be wise to invest in top-rated, fundamentally sound Chinese stocks Alibaba Group Holding Limited (BABA), JD.com, Inc. (JD), and Hello Group Inc. (MOMO) for potential gains.
China’s retail sales and industrial output picked up pace in August with stronger-than-anticipated growth, as per National Bureau of Statistics data. Retail sales rose by 4.6% year-over-year, up from 2.5% in July and exceeding expectations for 3% growth forecast by a Reuters poll.
Industrial production in China increased by 4.5% in August from a year earlier, faster than the 3.7% year-over-year pace in July and better than the 3.9% expected.
The solid industrial production and services output figures indicate Oxford Economics’ third-quarter GDP forecast is intact, and steady economic activity would mean the economy can reach about 5.1% growth in 2023, according to its lead economist, Louise Loo.
The International Monetary Fund (IMF) also sees some signs of stabilization in the Chinese economy after the recent data; however, it believes that the country can grow at a faster pace over the medium term if it takes steps to reform its economy to rebalance from investment toward consumer spending.
Chief spokesperson Julie Kozack said that the IMF still believes China can achieve around 5% growth this year.
Further, China has rolled out new stimulus measures to drive the country’s ailing property market and support a weakening yuan in an attempt to boost the economy.
As per a joint statement by the People’s Bank of China (PBOC) and the National Administration of Financial Regulation (NAFR), the minimum down payments for mortgages will be slashed to 20% for first-time buyers and 30% for second-time buyers. Also, interest rates on new mortgages are cut by nearly 40 percentage points.
Moreover, the nation plans to raise its 2023 budget deficit to spend an additional 1 trillion yuan ($137 billion) on infrastructure projects.
In light of these favorable trends, let’s look at the fundamentals of the three top China stock picks, beginning with number 3.
Stock #3: JD.com, Inc. (JD)
Headquartered in Beijing, China, JD offers supply chain-based technologies and services. The company’s JD Retail segment comprises retail, online marketplace, and marketing services in China. Its New Businesses segment includes logistics services to third parties, overseas business, tech initiatives, and asset management services to logistics property investors.
On August 16, JD and Gucci announced a digital partnership and the launch of the official Gucci flagship store on JD’s platform. It is the first time the Italian luxury brand will bring its unique fashion authority and 102-year-old legacy of Italian craftsmanship to the JD.com community. This strategic move solidifies JD’s position as a premier e-commerce destination.
JD’s net revenues increased 7.6% year-over-year to $39.71 billion for the second quarter that ended June 30, 2023. Its non-GAAP operating income rose 50% from the year-ago value to $1.20 billion. Also, its non-GAAP EBITDA grew 45% from the prior year’s quarter to $1.43 billion.
Furthermore, 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 was $0.37, an increase of 33% year-over-year.
Analysts expect JD’s EPS to increase 13.9% year-over-year to $2.90 for the fiscal year ending December 2023. The consensus revenue estimate of $149.29 billion for the ongoing year reflects a marginal year-over-year improvement. Moreover, the company surpassed the consensus EPS estimates in all trailing four quarters.
For the fiscal year 2024, the company’s EPS and revenue are expected to grow 15.9% and 9.2% from the prior year to $3.36 and $162.95 billion, respectively.
Shares of JD have plunged 12.3% over the past month to close the last trading session at $27.83.
JD’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates 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 and Value. It is ranked #17 out of 43 stocks within the B-rated China industry.
Click here to get additional JD ratings (Stability, Quality, and Momentum).
Stock #2: Alibaba Group Holding Limited (BABA)
Based in Hangzhou, China, BABA offers technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses engage with customers. It operates through seven segments, China Commerce; International Commerce; Local Consumer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others.
On October 12, Alibaba.com, part of Alibaba International Digital Commerce Group and America’s Beauty Show, announced a partnership to create an omnichannel platform to provide new pathways for growth in the beauty industry landscape in the United States and beyond. This collaboration might expand the company’s reach and drive its profitability.
On September 7, Alibaba.com launched a suite of new features, products, and enhancements to existing sourcing tools at its first Co-Create conference, supporting entrepreneurs in leveling up their sourcing and supply chain operations in the increasingly competitive small-business arena.
Some new features and upgrades include the Smart Assistant tool, Upgraded Image Search, smart enhancement to Request for Quotation (RFQ), real-time translation in 17 languages for live video chats with suppliers, and Alibaba.com Logistics Marketplace.
For the first quarter that ended June 30, 2023, BABA’s revenue increased 13.9% year-over-year to $32.29 billion. Its income from operations was $5.86 billion, up 70.3% from the prior year’s quarter. The company’s adjusted EBITDA grew 26.6% year-over-year to $7.18 billion.
Additionally, the company’s non-GAAP net income and non-GAAP EPS increased 48.5% and 47.6% year-over-year to $6.20 billion and $0.30, respectively. Its free cash flow came in at $5.39 billion, up 76.3% year-over-year.
Street expects BABA’s revenue for the fiscal year (ending March 2024) to increase 6.6% year-over-year to $131.65 billion. The company’s EPS for the current year is expected to grow 15.7% year-over-year to $8.97. Also, the company topped the consensus EPS estimates in all four trailing quarters, which is impressive.
BABA’s shares have gained 11.6% over the past year to close the last trading session at $84.51.
BABA’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
BABA has an A grade for Growth and a B for Quality and Sentiment. It is ranked #10 in the 43-stock China industry.
In addition to the POWR Ratings I’ve just highlighted, you can see BABA’s ratings for Momentum, Stability, and Value here.
Stock #1: Hello Group Inc. (MOMO)
MOMO, based in Beijing, China, provides mobile-based online social and entertainment services. It offers Momo, a mobile application that connects people and facilitates social interactions based on location, interests, and several online recreational activities; Tantan, a social and dating application; and other applications under the Hertz, Duidui, and Tietie names.
On June 7, MOMO’s board of directors authorized a share repurchase program under which the company may repurchase up to $200 million of its shares over the next 24 months. As of August 31, 2023, the company repurchased nearly 12.1 million ADSs for $57.20 million on the open market under this program at an average purchase price of $4.72 per ADS.
This repurchase share program could raise the company’s shareholder value.
For the second quarter that ended June 30, 2023, MOMO’s net revenues increased 1% year-over-year to $432.70 million. Its non-GAAP income from operations was $97.80 million, up 52.7% from the previous year’s quarter. Its non-GAAP net income grew 36.6% year-over-year to $87.10 million.
In addition, the company’s non-GAAP net income per ADS was $0.43, an increase of 41.4% year-over-year. Also, net cash provided by operating activities in the quarter was $114.20 million, up 313.2% from the same quarter of 2022.
Analysts expect MOMO’s revenue and EPS for the fiscal year (ending December 2024) to grow 3% and 3.4% from the prior year to $1.68 billion and $1.45, respectively. Additionally, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is remarkable.
MOMO’s stock has gained 4% over the past month and 47.9% over the past year to close the last trading session at $7.16.
MOMO’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.
The stock has an A grade for Value and a B for Sentiment and Quality. It is ranked #8 in the same industry.
Click here to access the additional ratings for MOMO’s Stability, Growth, and Momentum.
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BABA shares were trading at $84.96 per share on Friday morning, up $0.45 (+0.53%). Year-to-date, BABA has declined -3.55%, versus a 15.26% 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.
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