Despite several macro uncertainties, including deflation pressures, high debt, property downturn, and flat trade and foreign direct investment, China’s economy surpassed the government’s 5% target last year. For 2024, some experts remain optimistic about the nation’s economic prospects and expect it to be a major contributor to global growth.
Given a favorable economic outlook, fundamentally sound China stocks Sohu.com Limited (SOHU), Youdao, Inc. (DAO), and Autohome Inc. (ATHM) could be ideal buys in 2024 for substantial gains.
The Chinese economy rose by 5.2% for 2023, exceeding the target of ‘about 5%’ set by the government. That is compared to a 3% increase in 2022, when the economy was slowed due to COVID-19 and nationwide lockdowns. GDP for the last three months of 2023 grew by 5.2%, allowing the government to hit its annual growth target even though trade data and the economic recovery remain uneven.
China’s industrial output rose by 6.8% year-over-year in December 2023, faster than the 6.6% pace in November; however, retail sales increased slower than expected, keeping room open for more policy easing measures to sustain the Chinese economy into this year. Retail sales, an important gauge of consumption, grew 7.4% in December, slower from the 10.1% pace in November.
Further, the Chinese Academy of Sciences (CAS) expects China’s economy to grow by 5.3% in 2024, compared to the World Bank’s projection of 4.5% growth. The World Bank anticipates weak sentiment and increased economic uncertainty to weigh on consumption this year, while investment growth will remain restrained due to continued weakness in the property sector.
Despite the World Bank’s bleak outlook, the Chinese think tank sees the world’s second-largest economy holding ‘real potential’ this year, with upbeat economic growth driven by domestic consumption and investment but slightly dragged down by exports.
Several experts maintain an optimistic outlook on China’s future trajectory as the country navigates a vital phase of economic transition. The positive perspective is backed by a solid new growth engine characterized by a burgeoning middle class, changing consumption patterns, a surge in greenfield investment, and the integration of AI and data into the economic landscape.
Consumption emerged as a primary growth driver for the Chinese economy last year. According to data from the National Bureau of Statistics (NBS), final consumption contributed about 82.5% to GDP growth in 2023, with retail sales of consumer goods rising 7.2% year-over-year to more than $6.60 trillion.
Kevin Rudd, Australia’s ambassador to the United States, underscored the significant role of the Chinese consumer in economic growth. “The Chinese consumer is the best guarantor of China's economic future. So long as the Chinese consumer has confidence in the future, the economy will continue to grow reasonably well – that's a core fact,” he said.
Considering these encouraging trends in mind, let’s discuss the fundamentals of the three best China stock picks, starting with number 3.
Stock #3: Sohu.com Limited (SOHU)
SOHU offers online video and game products and services on PCs and mobile devices. Also, it provides online news, information, and content services through the mobile phone application Sohu News APP, mobile portal m.sohu.com, and www.sohu.com; and online video content and services through mobile phone application Sohu Video APP and tv.sohu.com.
On November 11, 2023, SOHU’s Board of Directors authorized a share repurchase program of up to $80 million of the company’s outstanding ADSs over the next two years. The ADSs will be purchased from time to time at Sohu’s management's discretion at prevailing market prices in accordance with Rule 10b-18 and Rule 10b5-1 under the Securities Exchange Act of 1934.
In terms of forward Price/Sales, SOHU is trading at 0.54x, 55.8% lower than the industry average of 1.19x. Likewise, the stock’s forward Price/Book multiple of 0.31 is 83.8% lower than the industry average of 1.90.
SOHU’s total revenues increased 4% quarter-over-quarter to $145.43 million for the third quarter that ended on September 30, 2023. Its non-GAAP operating profit was $52 million, up 6.1% from the previous quarter. Net income attributable to SOHU was $21.37 million, or $0.63 per ADS, compared to a net loss of $21.20 million or $0.62 per ADS in the prior quarter, respectively.
As of September 30, 2023, the company’s cash and cash equivalents, short-term investments, and long-term time deposits totaled nearly $1.40 billion.
SOHU’s stock climbed 9.9% over the past three months to close the last trading session at $9.35.
SOHU’s POWR Ratings reflect its bright prospects. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a B grade for Value and Sentiment. SOHU is ranked #17 of 40 stocks in the B-rated China industry.
In addition to the POWR Ratings we’ve stated above, one can access SOHU’s ratings for Growth, Momentum, Stability, and Quality here.
Stock #2: Youdao, Inc. (DAO)
Headquartered in Hangzhou, China, DAO is a leading technology-focused learning intelligent company that offers online services in the field of content, community, communication, and commerce. The company operates through three segments: Learning Services; Smart Devices; and Online Marketing Services.
On October 28, 2023, DAO launched Youdao Smart Learning Pad X10, its new intelligent learning tool. The Youdao Smart Learning Pad X10 is powered by industry-leading AI technology and showcases a unique AI-supported “Learning Dashboard.”
The distinctive feature of this product is that it tracks and presents users’ performances in real-time and offers users several customized suggestions that focus on improving areas of comprehension weaknesses. The new product is strategically added to Youdao’s growing portfolio of AI-driven educational tools, driving the company’s profitability and growth.
Also, on August 9, the company unveiled new products, including Youdao Dictionary Pen X6 pro and S6 and Youdao Listening Pod pro, at its 2023 Intelligent Learning Product Launch Event. These new product launches expand DAO’s existing portfolio of intelligent learning devices.
In terms of forward EV/Sales, DAO is trading at 0.78x, 34.9% lower than the industry average of 1.20x. Also, the stock’s forward Price/Sales of 0.56x is 37.2% lower than the industry average of 0.89x.
In the third quarter that ended September 30, 2023, DAO’s net revenue increased 9.7% year-over-year to $210.90 million. Its net revenues from learning services grew 7% from the year-ago value to $130.30 million, and its net revenues from online marketing services were $46.10 million, up 113.5% from the prior year’s quarter.
Furthermore, the company’s gross profit for the third quarter rose 13.1% year-over-year to $117.80 million.
Analysts expect DAO’s revenue for the fiscal year (ended December 2023) to increase 3.9% year-over-year to $754.62 million. For the fiscal year 2024, the company’s revenue is expected to grow 17% from the prior year to $882.98 million. Moreover, DAO has surpassed the consensus revenue estimates in three of the trailing four quarters.
Shares of DAO have declined 15.7% over the past month to close the last trading session at $3.38.
DAO’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, translating to a Buy in our proprietary rating system.
DAO has a grade of B for Value and Growth. Within the B-rated China industry, it is ranked #13 among 40 stocks.
Click here to see DAO’s ratings for Sentiment, Momentum, Stability, and Quality.
Stock #1: Autohome Inc. (ATHM)
Based in Beijing, China, ATHM is an online destination for automobile consumers. The company delivers interactive content and tools to automobile consumers via its websites, including autohome.com.cn, che168.com, and ttpai.cn on PCs, mobile devices, mobile applications, and mini apps. It also offers media services and Autohome Mall, an online transaction platform.
On December 12, ATHM’s Board of Directors approved a cash dividend of $1.15 per ADS (or $0.2875 per ordinary share), paid to holders of ADSs and ordinary shares of record as of the close of business on December 29, 2023. The aggregate amount of the dividend was nearly RMB 1 billion ($140.19 million).
The company’s annual dividend of $1.11 translates to a yield of 4.49% on the current share price. ATHM’s four-year average dividend yield is 1.57%.
ATHM’s forward non-GAAP P/E of 10.26x is 33.7% lower than the 15.49x industry average. The stock’s forward EV/Sales of 0.01x is 99.2% lower than the industry average of 1.86x. Also, its forward Price/Book of 0.86x is 54.9% lower than the industry average of 1.90x.
For the third quarter that ended on September 30, 2023, ATHM’s net revenues increased 3.4% year-over-year to $261.24 million. Its gross profit grew 1.3% from the year-ago value to $210.04 million. Also, adjusted net income attributable to Autohome and non-GAAP EPS amounted to $78.69 million and $0.17, increases of 2.3% and 4.2% year-over-year, respectively.
In addition, the company’s adjusted EBITDA increased 22.4% year-over-year to $74.03 million. As of September 30, 2023, it had cash and cash equivalents and short-term investments of $3.21 billion.
For the fiscal year ending December 2024, Street expects ATHM’s revenue and EPS to grow 4.4% and marginally year-over-year to $1.03 billion and $2.41, respectively. In addition, the company topped consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
ATHM’s shares have plunged 9.7% over the past month to close the last trading session at $24.72.
ATHM’s sound 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 stock has a grade of B for Value and Quality. ATHM is ranked #9 within the same industry.
To access ATHM’s POWR ratings for Growth, Momentum, Stability, and Sentiment, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
ATHM shares were unchanged in premarket trading Friday. Year-to-date, ATHM has declined -11.90%, versus a 0.25% 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.
3 China Stocks to Buy for Smart Investors in 2024 StockNews.com
