China's economic recovery is gaining momentum as we navigate through the second quarter of 2024. Fueled by a resilient rebound in exports and strategic policy initiatives, the nation is steering through structural challenges like property sector reforms with cautious optimism.
In light of this, now might be an opportune time to consider investing in three fundamentally strong China stocks: Tencent Holdings Limited (TCEHY), NetEase, Inc. (NTES), and JD.com, Inc. (JD).
The world’s second-largest economy expanded at a healthy pace, exceeding both expectations and last year's results. In the first quarter, China's GDP grew by 5.3% year-over-year, higher than the 5.2% growth seen in the prior quarter and beating economists’ forecasts of a 4.6% increase. This positive momentum has been fueled by Beijing's ongoing support measures and a surge in consumer spending during the Lunar New Year festival.
In April, China's industrial sector showed stronger growth momentum, with major industrial enterprises posting a 4% year-over-year profit increase, compared to a 3.5% drop in March. Analysts credit this rebound to supportive government policies and a resurgence in domestic consumption, reflecting broader economic stability.
May continued the upward trend, boasting a 3.7% year-on-year rise in retail sales and a solid 5.6% growth in industrial output. Fixed-asset investment also saw a healthy 4% increase in the year's first five months, propelled by strong policy support and festive consumer spending during the May Day holiday.
Looking ahead, Beijing has set a growth target of nearly 5% for 2024. The country aims to achieve an urban unemployment rate of around 5.5%, create 12 million new urban jobs, and maintain a consumer price index increase of approximately 3%.
Given the country’s economic resurgence and a promising macroeconomic outlook, let’s now examine the fundamentals of the featured China stocks in detail, beginning with number three:
Stock #3: Tencent Holdings Limited (TCEHY)
Headquartered in Shenzhen, China, TCEHY is an investment holding company that offers value-added services (VAS), online advertising, fintech, and business services globally. The company operates through VAS; Online Advertising; FinTech and Business Services; and Others segments.
TCEHY’s trailing-12-month EBITDA and levered FCF margins of 32.08% and 23.23% are 69.5% and 177.9% higher than the industry averages of 18.93% and 8.36%, respectively. Also, the stock’s 21.22% trailing-12-month net income margin compares favorably to the 2.89% industry average.
For the first quarter that ended March 31, 2024, TCEHY’s total revenues increased 6.3% year-over-year to RMB159.50 billion ($21.94 billion). Its gross profit grew 23% from the prior year’s quarter to RMB83.87 billion ($11.53 billion). Its non-IFRS operating profit came in at RMB58.62 billion ($8.06 billion), up 30% year-over-year.
In addition, non-IFRS profit attributable to equity holders of the company rose 54.5% from the year-ago value to RMB50.23 billion ($6.91 billion). Also, its earnings per share for the quarter stood at RMB4.38, up 66.2% year-over-year.
Street expects TCEHY’s revenue and EPS for the second quarter (ending June 2024) to increase 8.5% and 33.9% year-over-year to $22.19 billion and $0.71, respectively. Moreover, the company has surpassed consensus EPS estimates in three of the trailing four quarters, which is impressive.
The stock has gained 29.3% over the past six months to close the last trading session at $47.30.
TCEHY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
TCEHY has an A grade for Sentiment and a B for Stability. It is ranked #10 out of 39 stocks within the B-rated China industry.
Beyond what is stated above, we’ve also rated TCEHY for Growth, Value, Momentum, and Quality. Get all TCEHY ratings here.
Stock #2: NetEase, Inc. (NTES)
Based in Hangzhou, NTES is engaged in online gaming, music streaming, online intelligent learning services, and internet content services businesses both domestically and internationally. It operates through Games and Related Value-Added Services; Youdao; Cloud Music; and Innovative Businesses and Others segments.
In April, Blizzard Entertainment and NTES announced a renewed publishing deal, paving the way for the sequential return of Blizzard titles to mainland China beginning in the summer of 2024. The renewed publishing agreement includes popular titles like World of Warcraft®, Hearthstone®, and others from the Warcraft®, Overwatch®, Diablo®, and StarCraft® series.
Additionally, NTES entered into an agreement with Microsoft Gaming to explore bringing new NetEase titles to Xbox consoles and other platforms.
The stock’s trailing-12-month gross profit and EBITDA margins of 61.92% and 29.12% are 24.4% and 53.8% higher than the 49.77% and 18.93% industry averages, respectively. Its trailing-12-month ROTA of 15.53% compares with the industry average of 1.28%.
NTES’ net revenues increased 7.2% year-over-year to RMB26.85 billion ($3.72 billion) for the fiscal first quarter that ended March 31, 2024. Its gross profit grew 14.2% from the year-ago value to RMB17.02 billion ($2.36 billion).
Also, the company’s operating profit increased 5.6% from the prior-year quarter to RMB7.62 billion ($1.06 billion). NTES’ attributable non-GAAP net income came in at RMB8.51 billion ($1.18 billion) and RMB2.62 per share, representing 12.5% and 12.9% year-over-year improvements.
The consensus EPS estimate of $1.84 for the fiscal third quarter (ending September 2024) represents a marginal improvement year-over-year. The consensus revenue estimate of $3.96 billion for the next quarter indicates a 5.1% increase from the same period last year. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.
Over the past six months, the stock has gained 9.1%, closing the last trading session at $95.58.
NTES’ solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
It also has a B grade for Value, Stability, and Quality. Out of the 39 stocks in the same industry, it is ranked #6. To see the other ratings of NTES for Growth, Momentum, and Sentiment, click here.
Stock #1: JD.com, Inc. (JD)
Headquartered in Beijing, the People’s Republic of China, JD offers computers, communication, consumer electronics, home appliances, and general merchandise products.
JD’s trailing-12-month asset turnover ratio of 1.91x is 92.1% higher than the 1.00x industry average. Likewise, the stock’s trailing-12-month cash per share of $7.40 is 198.7% higher than the $2.48 industry average.
For the fiscal first quarter, which ended on March 31, 2024, JD’s total net revenues increased 7% from the prior-year quarter to RMB260.15 billion ($36.02 billion). Its income from operations stood at RMB7.70 billion ($1.07 billion), up 23.3% year-over-year. The company’s attributable non-GAAP net income amounted to RMB8.90 billion ($1.23 billion) and $2.83 per share, reflecting an increase of 17.2% and 18.9% year-over-year, respectively.
Analysts expect JD’s revenue for the second quarter (ending June 2024) to increase 6.3% year-over-year to $41.96 billion. Its EPS for the same quarter is projected to grow 6.7% from the prior year to $0.79. Moreover, the company has topped consensus revenue and EPS estimates in each of the trailing four quarters.
However, the stock has lost 5.1% over the past three months to close the last trading session at $25.84.
JD’s bright prospects are reflected in its POWR Ratings. The stock has an overall B rating, translating to a Buy in our proprietary rating system.
It also has a B grade for Growth, Value, and Sentiment. Within the same B-rated industry, it is ranked #5. Click here to see JD’s ratings for Momentum, Stability, and Quality.
What To Do Next?
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TCEHY shares were unchanged in after-hours trading Friday. Year-to-date, TCEHY has gained 26.26%, versus a 15.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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