China’s faster-than-expected GDP growth in the third quarter and solid consumption and industrial activity last month showed economic recovery gaining traction amid a recent flurry of stimulus measures. So, let’s find out if it is the right time to invest in Chinese stocks Alibaba Group (BABA) and NetEase (NTES). Continue reading….
China’s economic growth came in stronger than expected in the third quarter, propelling hopes that the world’s second-largest economy will meet or even surpass its GDP target of about 5% this year. Consumption and industrial activity in September also showed signs of stabilization in recent economic data.
Given an optimistic economic outlook, it could be an opportune time to invest in fundamentally sound Chinese stocks Alibaba Group Holding Limited (BABA) and NetEase, Inc. (NTES) for solid returns.
China’s economic recovery regained momentum as the nation’s third-quarter Gross Domestic Product (GDP) grew faster than expected. At the same time, consumption and industrial activity in September also surprised on the upside, indicating that the recent series of policy measures are helping sustain the growth trajectory.
Data released by the National Bureau of Statistics showed that China’s economy grew 4.9% in the July to September quarter year-over-year, above analysts’ expectations of a 4.4% growth. Quarter-over-quarter, the nation’s GDP rose 1.3%, following revised second-quarter growth of 0.5%.
Furthermore, China released monthly data, posting 4.5% growth in industrial production and 5.5% surge in retail sales, a gauge of consumption, in September from a year ago, both slightly beating market expectations.
The positive economic data suggests that recent stimulus measures, including interest rate cuts and several steps to encourage home sales and support a weakening yuan, have significantly helped stabilize the economy.
According to 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. Earlier, homebuyers in cities like Beijing and Shanghai had to find down payments of at least 30% to 40%.
In addition, interest rates on new mortgages are cut by nearly 40 percentage points after the central bank lowered its one-year loan prime rate to 3.45% from 3.55%.
The nation also plans to raise its 2023 budget deficit to spend an additional 1 trillion yuan ($137 billion) on infrastructure projects. This proposed stimulus spending aims to boost the Chinese economy by funding construction.
In light of these encouraging trends, let’s look at the fundamentals of the three top China stock picks, beginning with number 2.
Stock #2: Alibaba Group Holding Limited (BABA)
Headquartered in Hangzhou, China, BABA offers technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses engage with customers. It operates through China Commerce; International Commerce; Local Consumer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others segments.
On October 17, BABA’s Alibaba Cloud launched a sustainability web application to encourage eco-friendly behavior inside the three Asian Games’ villages and a sign language interpreter to assist individuals with hearing impairments in accessing the Asian Para Games. Alibaba Cloud’s AI-powered tools drive sustainability and inclusiveness at Hangzhou Asian.
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.
Also, on September 7, Alibaba.com introduced 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. These new launches might extend the company’s market reach and boost its profitability.
BABA’s trailing-12-month EBIT margin and net income margin of 14.01% and 9.40% are higher than the respective industry averages of 7.36% and 4.38%. Likewise, the stock’s trailing-12-month levered FCF margin of 11.66% is 128.8% higher than the industry average of 5.10%.
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 rose 70.3% from the prior year’s quarter to $5.86 billion. Its adjusted EBITDA grew 26.6% year-over-year to $7.18 billion. Also, its free cash flow was $5.39 billion, up 76.3% year-over-year.
Further, 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.
Analysts expect BABA’s revenue for the second quarter (ended September 2023) to increase 7.1% year-over-year to $31.01 billion. The consensus EPS estimate of $2.08 for the same period indicates a 15.5% rise year-over-year. Moreover, the company has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.
For the fiscal year ending March 2024, the company’s revenue and EPS are expected to grow 6.5% and 15.7% from the prior year to $131.44 billion and $8.97, respectively.
Shares of BABA have gained 8.7% over the past year to close the last trading session at $83.01.
BABA’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.
BABA has an A grade for Growth and a B for Sentiment and Quality. Within the B-rated China industry, it is ranked #10 of 43 stocks.
Click here to see the other ratings of BABA for Value, Momentum, and Stability.
Stock #1: NetEase, Inc. (NTES)
Based in Hangzhou, China, NTES engages in online games, music streaming, online intelligent learning services, and internet content services businesses internationally. The company operates through Games and Related Value-Added Services; Youdao; Cloud Music; and Innovative Businesses and Others segments.
On August 17, NTES announced the establishment of a new game development studio, T-Minus Zero Entertainment, in Austin, Texas.
This studio is the latest addition to NTES Games’ ever-expanding portfolio and it is under the leadership of Rich Vogel, a seasoned game developer with an impressive track record, having spearheaded the launch of several studios, including Sony Online Entertainment Austin, Bioware Austin, etc.
Also, on July 14, NTES announced a strategic partnership with RYCE Entertainment, one of China’s leading music and entertainment companies. The two companies will collaborate to promote RYCE Entertainment’s renowned artists and music catalog within China, leveraging their strengths in music production and distribution.
This partnership is expected to expand NTES’ broad music content library, driving the company’s growth.
NTES’ trailing-12-month gross profit margin of 56.92% is 16.1% higher than the industry average of 49.02%. Also, the stock’s trailing-12-month EBIT margin and net income margin of 22.72% and 25.95% are considerably higher than the industry averages of 7.71% and 3.45%, respectively.
NTES’ net revenues increased 3.7% year-over-year to $3.31 billion for the second quarter ended on June 30, 2023. Its gross profit grew 11.1% from the year-ago value to $1.98 billion. The company’s operating profit rose 22.6% year-over-year to $836.08 million.
In addition, non-GAAP net income from continuing operations attributable to the company’s shareholders was $1.24 billion, up 66.7% year-over-year. NTES reported non-GAAP net income from continuing operations of $0.39 per share, compared to $0.23 per share in the same quarter of 2022.
Street expects NTES’ revenue and EPS for the fiscal year (ending December 2023) to increase 3.2% and 26.6% year-over-year to $14.43 billion and $6.34, respectively. In addition, the company has topped the consensus EPS estimates in each of the trailing four quarters.
NTES’ stock has gained 12.4% over the past six months and 47.2% over the past year to close the last trading session at $104.05.
NTES’s POWR Ratings reflect bright prospects. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
NTES has an A grade for Stability and Sentiment and a B for Value and Quality. It is ranked #2 in the same industry.
In addition to the POWR Ratings we’ve stated above, we also have NTES’ ratings for Growth and Momentum. Get all NTES ratings here.
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BABA shares were trading at $81.64 per share on Thursday morning, down $1.37 (-1.65%). Year-to-date, BABA has declined -7.32%, versus a 13.79% 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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