Despite the deepening crisis in its property sector, China, the world’s second-largest economy, reported a stronger-than-expected economic growth of 5.3% in the January-March quarter. Amid ongoing challenges, China is expected to support the economy with prudent monetary and proactive fiscal policies.
Given the industry’s bright prospects, it could be wise to invest in fundamentally strong China stocks HUTCHMED (China) Limited (HCM), Autohome Inc. (ATHM), and Youdao, Inc. (DAO) with solid buy potential in May.
Despite challenges in the real estate industry, import-export imbalances, and muted domestic demand, China’s GDP grew 5.3% in the first quarter compared to the year ago, faster than the Reuters poll expectations of 4.6% growth and a revised fourth-quarter 1.2% expansion. Further, Beijing has set a 2024 growth target of around 5% for the economy.
Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said, “Growth was driven in part by external demand, as export volume grew by 14% year on year”.
Moreover, China’s retail sales of consumer goods, a key indicator of the nation’s consumption strength, surged 4.7% year-on-year in the first quarter. Retail sales in the urban regions grew 4.6% year-over-year, while that in rural areas rose 5.2%. Online retail sales climbed 12.4 year-on-year, and sales of physical goods online increased by 11.6 %.
By opening its markets wider to foreign investors and promoting high-quality growth, China aims to be a critical force for the world's economic recovery this year. The economy will harness tech innovation as a new point for economic growth and is open to forming associations with other countries.
Further, to combat ongoing headwinds, China’s regulators will continue to support the economy with prudent monetary and proactive fiscal policies, like interest rates and bank reserve requirement ratios (RRR), being flexible with policies in the world's second-biggest economy.
Considering the encouraging trends, let’s delve into the fundamentals of the top three China stocks, beginning with the third choice.
Stock #3: HUTCHMED (China) Limited (HCM)
Based in Hong Kong, HCM discovers, develops, and commercializes targeted therapeutics and immunotherapies for cancer and immunological diseases internationally. It develops Savolitinib, and Fruquintinib. It also develops Surufatinib for treating pancreatic neuroendocrine tumor (NET) and Sovleplenib, which treat hematological cancers.
On April 26, HCM announced that its partner Takeda Pharmaceutical Co. Ltd. (TAK) received notification that the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) recommended the approval of fruquintinib for treating adult patients with previously treated metastatic colorectal cancer.
The positive opinion is based on results from FRESCO-2 Phase III clinical trial, and if approved in the European Union, fruquintinib will become the first novel targeted therapy for metastatic colorectal cancer.
On April 2, HCM and Innovent Biologics, Inc. announced that the NDA for the combination of fruquintinib and sintilimab for treating patients with advanced endometrial cancer with pMMR1 or non-MSI-H2 tumors was accepted and granted priority review by the China National Medical Products Administration (NMPA).
The combination of fruquintinib and sintilimab advances the potential to bring a new treatment option to endometrial cancer patients.
For the fiscal year that ended December 31, 2023, HCM’s total revenue increased 96.5% year-over-year to $838 million, and its Oncology/Immunology consolidated revenue grew 222.6% year-over-year to $528.62 million.
In addition, net income and EPS attributable to HUTCHMED came in at $100.78 million and $0.12 against net loss and loss per share of $360.83 million and $0.43 in the prior year’s period, respectively. The company’s total assets were $1.28 billion as of December 31, 2023, compared to $1.03 billion as of December 31, 2022.
Street expects HCM’s revenue for the fiscal year 2025 to increase 22.7% year-over-year to $835.80 million, and the company’s EPS for the same period is expected to be $0.30. Shares of HCM have surged 10.6% over the past month and 22.5% over the past year to close the last trading session at $18.51.
HCM’s solid 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.
HCM has an A grade for Sentiment and a B for Value. It is ranked #13 out of 39 stocks in the B-rated China industry.
In addition to the POWR Ratings we’ve stated above, we also have HCM ratings for Momentum, Quality, Stability, and Growth. Get all HCM ratings here.
Stock #2: Autohome Inc. (ATHM)
Headquartered in Beijing, ATHM offers an online destination for automobile consumers in the People's Republic of China. It delivers interactive content and tools to automobile consumers through its websites, autohome.com.cn, che168.com, and ttpai.cn on PCs, mobile devices, mobile applications, and mini apps.
On December 12, 2023, ATHM’s Board of Directors approved a cash dividend of $1.15 per ADS (or $0.2875 per ordinary share) to holders of ADSs and ordinary shares of record as of the close of business on December 29, 2023. The dividend was paid to holders of ordinary shares and ADS on March 27, 2024.
ATHM pays an annual dividend of $1.11, which translates to a yield of 4.33% at the current share price. Its four-year average dividend yield is 1.96%.
In terms of forward non-GAAP P/E, ATHM is trading at 11.09x, 17.8% lower than the industry average of 13.48x. Likewise, the stock’s forward Price/Book multiple of 0.85 is 59% lower than the industry average of 2.08.
During the fourth quarter that ended December 31, 2023, ATHM’s total net revenues increased marginally year-over-year to RMB 1.91 billion ($269.22 million), of which its online marketplace and others revenue rose 14.6% year-over-year to RMB 569.48 million ($78.62 million). Its gross profit grew 1.4% from the year-ago value to RMB 1.54 billion ($217.41 million)
Furthermore, adjusted net income attributable to Autohome and non-GAAP EPS came in at RMB 502.79 million ($70.82 million) and RMB 1.04 for the quarter, respectively.
Analysts expect ATHM’s revenue and EPS for the fiscal year (ending December 2025) to increase 4.5% and 5.2% year-over-year to $1.08 billion and $2.43, respectively. Furthermore, the company has surpassed the consensus EPS and revenue estimates in all four trailing quarters, which is impressive.
ATHM’s stock has gained 3.3% over the past three months to close the last trading session at $25.70.
ATHM’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
The stock has a B grade for Quality and Value. ATHM is ranked #8 among 39 stocks in the B-rated China industry.
Click here to access ATHM’s ratings for Growth, Stability, Momentum, and Sentiment.
Stock #1: Youdao, Inc. (DAO)
Based in Hangzhou, DAO is an internet technology company that offers online services in the fields of content, community, communication, and commerce. It operates in three segments: Learning Services; Smart Devices; and Online Marketing Services.
In terms of forward EV/Sales, DAO is trading at 0.67x, 42.8% lower than the industry average of 1.18x. Similarly, the stock’s forward Price/Sales multiple of 0.49 is 42.7% lower than the industry average of 0.85.
DAO’s trailing-12-month gross profit margin of 51.35% is 42.1% higher than the industry average of 36.12%. Likewise, the stock’s trailing-12-month Asset Turnover Ratio of 2.73x is 177.6% higher than the industry average of 0.99x.
For the fourth quarter that ended December 31, 2023, DAO’s total net revenues increased 1.8% year-over-year to $208.53 million, and its gross profit was $104.06 million. The company’s income from operations grew 209.2% from the year-ago value to $10.74 million.
Also, non-GAAP net income from continuing operations attributable to ordinary shareholders of the company amounted to $9.76 million and $0.08 per ADS, increases of 122.6% and 132% year-over-year, respectively.
Street expects DAO’s revenue for the first quarter (ended March 2024) to grow 12% year-over-year to $184.09 million. Also, the company’s revenue is expected to increase 14.5% year-over-year to $858.33 million for the fiscal year 2024. In addition, DAO has surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past three months, DAO’s stock has surged 7% to close the last trading session at $3.50.
DAO’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has an A grade for Sentiment. It also has a B grade for Growth and Value. Within the same industry, DAO is ranked #5 of 39 stocks.
Click here to access additional ratings of DAO for Momentum, Stability, and Quality.
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HCM shares were trading at $18.31 per share on Wednesday morning, down $0.20 (-1.08%). Year-to-date, HCM has gained 1.10%, versus a 5.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
3 Top China Picks for May With Strong Buy Signals StockNews.com
