China’s economy outperformed forecasts in the third quarter, with surprising increases in consumption and industrial activity. Appropriate policy steps supported a modest comeback and upward growth trajectory.
Against this backdrop, investing in fundamentally sound Chinese stocks Alibaba Group Holding Limited (BABA) and Hello Group Inc. (MOMO) could be wise.
China reported better-than-expected retail sales and industrial data for October, with retail sales growing by 7.6% and industrial production rising by 4.6% year-over-year. These positive data indicate a robust recovery in China’s domestic consumption and manufacturing sector. Retail sales rise indicates that Chinese consumers are gaining confidence and increasing their spending, which bodes well for the entire economy.
China’s economy shows signs of stabilization, with the tech sector playing a crucial role in driving growth. With government support and investment, the tech sector will likely continue flourishing.
Despite the Chinese government's regulatory clampdowns, China's tech giants remain of enormous significance in the opinion of industry experts. Analyst Dan Ives believes that despite continued regulatory challenges, companies such as Baidu, JD, and Tencent continue to present attractive investment prospects.
The Chinese tech sector, a global leader in innovation, is poised for enormous expansion due to government investment in R&D, artificial intelligence, 5G technology, and e-commerce.
Considering these conducive trends, let’s look at the fundamentals of the China stock picks, beginning with number 2.
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, 2023, Alibaba.com, a part of Alibaba International Digital Commerce Group, and America's Beauty Show, announced a collaboration to develop an omnichannel platform that will open new doors for growth in the beauty sector in the United States and abroad. This relationship can potentially broaden the company's reach and increase its profitability.
BABA’s forward non-GAAP PEG multiple of 0.52 is 64.7% lower than the industry average of 1.48. Its forward non-GAAP P/E multiple of 9.62% is 35.2% lower than the industry average of 14.85.
BABA’s trailing-12-month EBIT margin of 14.01% is 89.1% higher than the 7.41% industry average. Its trailing-12-month levered FCF margin of 11.66% is 125.3% higher than the 5.18% industry average.
For the second quarter that ended September 30, 2023, BABA’s revenue increased 8.5% year-over-year to $30.81 billion. Its income from operations was $4.60 billion, up 33.6% from the prior year’s quarter. The company’s adjusted EBITDA grew 13.7% year-over-year to $6.75 billion.
Additionally, 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.
Street expects BABA’s revenue to increase 7.6% year-over-year to $132.89 billion for the year ending March 2024. Its EPS is expected to grow 14.6% year-over-year to $8.88 for the same period. It surpassed EPS estimates in all four trailing quarters. Over the past year, the stock has gained marginally to close the last trading session at $79.11.
BABA’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
BABA also has an A grade for Growth and a B for Sentiment, Momentum and Quality. It is ranked #8 out of 41 stocks in the B-rated China industry. Click here to see the additional POWR Ratings for Value and Stability for BABA.
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.
MOMO’s forward EV/Sales multiple of 0.36 is 79.7% lower than the industry average of 1.77. Its forward Price/Sales multiple of 0.84% is 25.9% lower than the industry average of 1.13.
MOMO’s trailing-12-month ROTA of 11.46% is 836.5% higher than the 1.22% industry average. Its trailing-12-month ROCE of 16.72% is 390.9% higher than the 3.41% industry average.
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.
The consensus revenue estimate of 1.68 billion for the year ending December 2024 represents a 2.6% increase year-over-year. Its EPS is expected to grow 3% year-over-year to $1.45 for the same period. It surpassed EPS estimates in all four trailing quarters. MOMO’s shares have gained 22.8% over the past year to close the last trading session at $7.06.
MOMO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #7 in the same industry. It has an A grade for Value and a B for Sentiment and Quality. To see additional MOMO’s ratings for Growth, Momentum and Stability, click here.
What To Do Next?
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BABA shares fell $2.29 (-2.89%) in premarket trading Friday. Year-to-date, BABA has declined -12.93%, versus a 19.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
Diving Into Chinese Tech: Analyzing the Prospects of Alibaba (BABA) and Hello Group (MOMO) for Investors StockNews.com
