The Chinese stock market has been amongst the worst-performing major markets over the past few years as it faced the challenges of stringent COVID restrictions, regulatory crackdowns on the private sector, geopolitical tensions, and expectations of slowing economic growth. Chinese authorities are not only trying to boost economic growth but also to stabilize its stock market through various positive measures.
Given this backdrop, it could be worth buying fundamentally strong Chinese stocks Alibaba Group Holding Limited (BABA), Hello Group Inc. (MOMO), and Tencent Holdings Limited (TCEHY).
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in China’s stock market and which factors will shape its prospects.
The Chinese stock market has been underperforming over the past few years as the economy struggled with deflation, record-high youth unemployment, sluggish demand, frequent COVID lockdowns, declining birth rates, crackdowns on large tech companies, and a property downturn. However, China’s economy grew at 5.2% last year, surpassing the government’s estimates of 5%.
Chinese think tanks foresee real potential in 2024, expecting China to play a significant role in global growth. China’s promising growth trajectory is underscored by upbeat economic growth prospects driven primarily by domestic consumption and investments.
Looking ahead, the Chinese Academy of Sciences forecasts a 5.3% economic growth in 2024, which surpasses the World Bank’s projection of 4.5%. China’s economic recovery seems to be on track after the release of upbeat economic data, which showed that more than 61 million rail journeys were undertaken during the week-long Lunar New Year break, a 61% rise year-over-year and the most in five years.
In addition, domestic tourism spending rose 47.3% year-over-year to ¥632.70 billion ($88.84 billion). Nearly 474 million tourist trips were made during the festival. The inflow of positive economic data is expected to boost investor sentiments. Furthermore, investors would be rejoicing the People’s Bank of China’s decision to hold the rate on its one-year policy loans at 2.5%, in line with economists’ expectations.
Chinese authorities had previously attempted to boost the stock market before the holidays with state-owned funds ratcheting up stock purchases, restriction on short-selling, and the central bank cutting the reserve ratio requirement for banks by 50 basis points.
The People’s Bank of China, in its latest monetary policy implementation report, said that it would keep policy flexible to boost domestic demand while maintaining price stability. This has led to renewed optimism amongst investors and market watchers as they look forward to more monetary easing measures that would support China’s economy.
Considering these encouraging trends, let’s discuss the fundamentals of the three China stock picks, starting with the third choice.
Stock #3: Alibaba Group Holding Limited (BABA)
Based in Hangzhou, People’s Republic of China, BABA provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses engage with their users and customers internationally. It operates through seven segments: China Commerce, International Commerce, Local Consumer Services, Cainiao, Cloud, Digital Media and Entertainment, Innovation Initiatives, and Others.
In terms of the trailing-12-month EBITDA margin, BABA’s 19.59% is 80.4% higher than the 10.86% industry average. Its 15.77% trailing-12-month levered FCF margin is 174.8% higher than the 5.74% industry average. Likewise, the stock’s 5.51% trailing-12-month Return on Total Assets is 32% higher than the 4.17% industry average.
For the fiscal third quarter that ended September 30, 2023, BABA’s revenue increased 5.1% year-over-year to RMB260.35 billion ($36.56 billion). Its non-GAAP net income and non-GAAP earnings per ADS came in at RMB47.95 billion ($6.73 million) and RMB18.97, respectively. Moreover, its adjusted EBITDA came in at RMB59.57 billion ($8.36 million), up marginally year-over-year.
Street expects BABA’s revenue for the quarter ended December 31, 2023, to increase 3.3% year-over-year to $30.57 billion, and its EPS for the same quarter is expected to increase 2.7% year-over-year to $1.56. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past month, the stock has gained 6.4% to close the last trading session at $73.91.
BABA’s POWR Ratings reflect a positive outlook. It 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.
It has a B grade for Momentum and Quality. It is ranked #13 out…
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