Despite challenges like deflation, high debt, property downturn, and flat trade, China's economy surpassed the 5% target last year. Experts are optimistic for 2024, expecting China to play a major role in global growth, boosted by the widespread use of digital technologies and increased internet usage. With the help of fiscal support, China could aim for 5% growth in the year ahead.
Therefore, fundamentally strong China stocks Sohu.com Limited (SOHU) and Alibaba Group Holding Limited (BABA) could be ideal buys now.
Before diving deeper into the fundamentals of these stocks, let’s discuss how China’s economic progress could support the country’s key companies.
Despite weak sentiment and economic uncertainty affecting consumption and investment growth, Chinese think tanks foresee real potential in 2024. Upbeat economic growth driven by domestic consumption and investment, though slightly dampened by exports, underscores China's promising trajectory.
China's industrial output surged by 6.8% year-over-year in December 2023, outpacing November's 6.6%, while retail sales growth lagged expectations, prompting potential policy easing measures. The Chinese Academy of Sciences anticipates 5.3% economic growth in 2024, exceeding the World Bank's projection of 4.5%.
Despite forecasts of slower growth, China's economy remains robust in 2024, with major investment banks projecting a 4.6% increase in real GDP. Though slower than previous years, China's resilience amid pandemic challenges and real estate market slumps underscores its enduring economic strength.
This optimism stems from a robust new growth engine, marked by a growing middle class, evolving consumption patterns, increased greenfield investment, and the integration of AI and data into the economic landscape.
Considering these encouraging trends, let’s discuss the fundamentals of the two China stock picks, starting with the second choice.
Stock #2: Sohu.com Limited (SOHU)
Headquartered in Beijing, China, SOHU provides online media, video, and game products and services on PCs and mobile devices in China. The company offers online news, information, and content services through mobile phone applications, as well as online video content and services through mobile phone applications and a video application for PCs.
On November 11, 2023, SOHU announced 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 at prevailing market prices at Sohu’s management's discretion, following Rule 10b-18 and Rule 10b5-1 under the Securities Exchange Act of 1934.
In terms of the trailing-12-month gross profit margin, SOHU’s 76.17% is 55.2% higher than the 49.07% industry average.
SOHU’s total revenues for the third quarter (ended on September 30, 2023) increased 4% year-over-year to $145.43 million. Its non-GAAP operating profit rose 6.1% from the previous quarter to $52 million. The company’s net income attributable to SOHU stood at $21.37 million, or $0.63 per ADS, compared to a net loss of $21.20 million or $0.62 per ADS in the year-ago quarter, respectively.
Over the past three months, SOHU’s stock has gained 16.1% to close the last trading session at $9.76.
SOHU’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 Value and Sentiment. It is ranked #19 out of 41 stocks in the B-rated China industry. To see SOHU’s Growth, Momentum, Stability, and Quality ratings, click here.
Stock #1: 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. The company operates through seven segments: China Commerce, International Commerce, Local Consumer Services, Cainiao, Cloud, Digital Media and Entertainment, and Innovation Initiatives and Others.
In terms of the trailing-12-month EBIT margin, BABA’s 14.66% is 94% higher than the 7.56% industry average. Its 14.50% trailing-12-month net income margin is 204.7% higher than the 4.76% industry average. Likewise, the stock’s 3.75% trailing-12-month Capex/Sales is 21.8% higher than the 3.08% industry average.
For the fiscal second quarter that ended September 30, 2023, BABA’s revenue increased 8.5% year-over-year to $30.81 billion. Its non-GAAP net income and non-GAAP earnings per ADS increased 18.8% and 21% over the prior-year quarter to $5.51 billion and $2.14, respectively. Moreover, its adjusted EBITDA came in at $6.75 billion, up 13.7% year-over-year.
Street expects BABA’s revenue for the quarter ended December 31, 2023, to increase 1.4% year-over-year to $36.39 billion, and its EPS for the quarter ending March 31, 2024, is expected to increase 9.1% year-over-year to $1.66. It surpassed the Street EPS estimates in all of the trailing four quarters. Over the past month, the stock has declined 3.9% to close the last trading session at $71.85.
BABA’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #14 in the same industry. It has a B grade for Momentum and Quality. Click here to see BABA’s Growth, Value, Stability, and Sentiment ratings.
What To Do Next?
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BABA shares rose $0.87 (+1.21%) in premarket trading Monday. Year-to-date, BABA has declined -7.30%, versus a 4.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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