Since COVID-19 restrictions were abandoned, China’s economy has shown signs of a stronger rebound, as evidenced by strong economic data in January and February, including robust retail sales and steady industrial production. Given a promising economic outlook, investors could consider buying fundamentally sound China stocks NetEase, Inc. (NTES), Sunlands Technology Group (STG), and Tarena International, Inc. (TEDU) for significant gains.
Before delving deeper into the fundamentals of these stocks, let us discuss what is happening in China’s economy.
China posted one of its weakest years of economic growth in decades last year, with the Gross Domestic Product (GDP) growing by 3%. In 2023, China’s recovery is broadly on track as it emerged from nearly three years of strict COVID-19 measures by dismantling its zero-Covid strategy in December last year.
According to the latest projections by the International Monetary Fund (IMF), China’s economic growth is expected to increase from 3% last year to 5.2% in 2023, driven by a rebound in private consumption amid the nation’s reopening.
Moreover, economic activity rebounded in January and February as retail sales rose 3.5% compared with the same period in 2021, marking a sharp turnaround from the 1.8% annual contraction reported in December. Industrial production in the first two months of 2023 increased by 2.4%, compared to a 1.3% rise in December. Also, investment in fixed assets, including infrastructure and machinery, grew by 5.5%.
US-listed China stocks gained significantly this month on upbeat economic data, with NASDAQ Golden Dragon China Index rising 4.3% over the past month. Furthermore, Goldman Sachs sees an economic shift from “reopening to recovery,” driving China stocks to as much as 24% by the end of 2023.
Let us take a closer look at the featured stocks:
NetEase, Inc. (NTES)
NTES provides online services internationally that focus on diverse content, community, communication, and commerce. The company operates through segments including Online Game Services; Youdao; Cloud Music; and Innovative Business and Others. It is headquartered in Hangzhou, the People’s Republic of China.
During the fourth quarter of 2022, NTES advanced the development of multiple games in the pipeline, such as Westward Journey Returns, Justice mobile game, Badlanders, Racing Master and Naraka: Bladepoint mobile game, and Harry Potter: Magic Awakened for the international markets.
In terms of the trailing 12-month gross profit margin, NTES’ 54.68% is 9% higher than the 50.16% industry average. The stock’s 20.34% trailing 12-month EBIT margin is 149.9% higher than the industry average of 8.14%. Likewise, its 21.08% trailing 12-month net income margin is 522.9% higher than the industry average of 3.38%.
NTES’ net revenue increased 4.3% year-over-year to $3.68 billion in the fourth quarter that ended December 31, 2022. Its gross profit rose 2.5% from the prior-year period to $1.92 billion. As of December 31, 2022, the company had cash and cash equivalents of $3.61 billion and $19.08 billion of total current assets.
The consensus revenue estimate of $15.26 billion for the fiscal year (ending December 2023) reflects a 9.2% year-over-year growth. The consensus EPS estimate of $5.11 for the current year indicates a 2% increase from the previous year. Moreover, NTES has an impressive earnings surprise history as it topped the consensus EPS estimates in all four trailing quarters.
Additionally, the company’s revenue and EPS for fiscal 2024 are expected to grow 9.4% and 10.8% year-over-year to $16.70 billion and $5.66, respectively. Shares of NTES have gained 13.7% over the past month and 17.2% over the past six months to close the last trading session at $88.59.
NTES’ solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
NTES has a B grade for Quality, Sentiment, Stability, and Value. In the 46-stock China industry, it is ranked #3.
Click here to see the other ratings of NTES for Growth and Momentum.
Sunlands Technology Group (STG)
Online education services company STG is headquartered in Beijing, the People’s Republic of China. It provides various degree- and diploma-oriented post-secondary courses. Also, it offers professional certification preparation courses in different industries and professions, including accounting, teaching, human resources, and finance.
STG’s trailing 12-month gross profit margin of 85.01% is 142.9% higher than the 35% industry average. And the stock’s 28.13% trailing 12-month EBITDA margin is 146.1% higher than the industry average of 11.43%. In addition, STG’s trailing 12-month net income margin of 27.72% is 516.1% higher than the industry average of 4.50%.
STG’s gross profit increased 0.8% year-over-year to $73 million for the fourth quarter that ended December 31, 2022. Its net income was $26.20 million, up 20% year-over-year. The company’s new student enrollments came in at 161,348, an increase of 48.2% year-over-year. As of December 31, 2022, the company’s cash, cash equivalents, and restricted cash were $109.80 million.
Over the past six months, the stock has gained 117.7% and 70.5% over the past year to close the last trading session at $9.12.
STG’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system.
STG has an A grade for Value and Quality and a B for Sentiment. The stock is ranked first among 46 stocks in the same industry.
Beyond what we stated above, we also have STG’s Growth, Stability, and Momentum ratings. Get all STG ratings here.
Tarena International, Inc. (TEDU)
Headquartered in Beijing, the People’s Republic of China, TEDU offers professional education services through full-time and part-time classes under the Tarena brand. The company operates through two segments: Adult Professional Education; and Childhood & Adolescent Quality Education Services.
On February 27, 2023, TEDU became one of the first approved ecosystem partners of ERNIE Bot, the generative AI chatbot by Baidu, Inc. (BIDU). As a part of the ecosystem, TEDU would get priority access to ERNIE Bot to explore its applications in different educational scenarios, marking the first application of the conversational language model in professional education.
This collaboration might strengthen TEDU’s market competitiveness and boost its profitability.
In terms of the trailing 12-month gross profit margin, TEDU’s 57.21% is 63.4% higher than the 35% industry average. Also, the stock’s 13.72% trailing 12-month levered FCF margin is 616.6% higher than the industry average of 1.91%.
For the fiscal year that ended December 31, 2022, TEDU’s net revenues increased 3.4% year-over-year to $357.80 million. The increase was driven by higher student enrollment in its IT-focused supplementary STEAM education. Its gross profit grew 19.1% from the year-ago value to $204.70 million.
Furthermore, the company’s operating income was $13.50 million in 2022, compared to an operating loss of $39.92 million in 2021. Its net income came in at $12.40 million, compared to a net loss of $69 million in the previous year.
Analysts expect TEDU’s revenue to increase 15.2% year-over-year to $391.95 million for the fiscal year ending December 2024. The company’s EPS for the same period is expected to grow 138.2% from the prior year to $2.76. Shares of TEDU have gained 29.2% over the past year to close the last trading session at $3.10.
TEDU’s POWR Ratings reflect its promising prospects. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
The stock has an A grade for Growth and a B for Value and Quality. It has topped the 42-stock China industry.
To see additional POWR Ratings for Momentum, Stability, and Sentiment for TEDU, click here.
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NTES shares were trading at $89.24 per share on Friday morning, up $0.65 (+0.73%). Year-to-date, NTES has gained 23.26%, versus a 6.42% 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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