China’s robust handling of past economic challenges has served as an anchor of stability in uncertain times. Despite facing economic volatility, the country's economy is expected to exhibit resilience for the foreseeable future. Assurances of more potent economic stimuli could revitalize investor confidence in 2024.
Amid this economic ebb and flow, investing in fundamentally strong Chinese stocks Hello Group Inc. (MOMO), JD.com, Inc. (JD), and Alibaba Group Holding Limited (BABA) could yield lucrative returns.
Before delving into the fundamentals of these stocks, let’s discuss the factors shaping China's economy.
The growth of the world’s second-largest economy, China, surpassed projections for the third quarter of 2023. Data from the National Bureau of Statistics showed that China’s gross domestic product (GDP) increased by 4.9% year-on-year in the July-September quarter.
Propelled by its large domestic market, expansive industrial system, and an abundance of human resources, China's economy is anticipated to maintain its momentum into the fourth quarter, ensuring its continued role as a vital cog in regional and global economic growth.
Despite ongoing market apprehensions and increasing caution from international bodies, a top government think tank projects China’s economic expansion at an optimistic 5.3% for this year.
Meanwhile, the World Bank predicts slower growth rates of 4.5% and 4.3% for 2024 and 2025, respectively, attributing this forecast to weakness in the real estate sector, tepid global demand, and structural impediments to growth, including high debt levels, an aging population, and a slowdown in productivity growth.
As part of measures to bolster the economy, fiscal spending will be moderately increased through comprehensive coordination of fiscal resources. This will involve utilizing special bonds, national bonds, and other policy instruments like tax incentives and fiscal subsidies. Chinese provinces are consequently preparing for bond issuances in 2024.
Goldman Sachs further posits that Chinese equities may be on the verge of their first index gains in four years in 2024. Predicted rises for MSCI China and CSI 300 stand at 12% and 15%, respectively, grounded in an anticipated earnings growth of about 10% and moderate valuation gains.
In light of these trends, let's look at the fundamentals of the three China stocks, beginning with number 3.
Stock #3: Hello Group Inc. (MOMO)
MOMO, based in Beijing, China, provides mobile-based online social and entertainment services. It offers Momo, a mobile application that connects people and facilitates social interactions based on location, interests, and several online recreational activities; Tantan, a social and dating application; and other applications under the Hertz, Duidui, and Tietie names.
As of December 8, 2023, MOMO repurchased 16.20 million ADSs for $86.10 million on the open market under this program at an average purchase price of $5.31 per ADS.
MOMO’s trailing-12-month ROCE, ROTC, and ROTA of 17.06%, 9.61%, and 11.77% are 400.8%, 170.3%, and 829.1% higher than the industry averages of 3.51%m 3.55%, and 1.27%, respectively. Its trailing-12-month EBIT and net income margins of 17.30% and 15.58% are 110.3% and 367% higher than the industry averages of 8.22% and 3.32%, respectively.
For the fiscal third quarter that ended September 30, 2023, MOMO’s total net revenues stood at $417.06 million, while non-GAAP income from operations increased 9.8% year-over-year to $93.37 million, respectively.
For the same quarter, its non-GAAP net income and net income per share attributable to ordinary shareholders stood at $82.46 million and $0.19, up 9.7% and 24.5% from the year-ago quarter, respectively. Moreover, its cash, cash equivalents and restricted cash increased 111% from the prior-year quarter to $1.05 billion.
Street expects MOMO’s EPS for the fiscal fourth quarter of 2023 (ended December 2023) to increase 5.4% year-over-year to $0.38. Its revenue is expected to be $428.59 million for the same quarter. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 1.1% intraday to close the last trading session at $6.63.
MOMO’s POWR Ratings reflect its positive prospects. The stock has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has an A grade for Value and a B for Sentiment. Within the A-rated China industry, it is ranked #14 out of 39 stocks.
To see additional POWR Ratings for Growth, Momentum, Stability, and Quality for MOMO, click here.
Stock #2: JD.com, Inc. (JD)
Headquartered in Beijing, China, JD provides supply chain-based technologies and services. The JD Retail segment encompasses online retail, marketplace, and Chinese marketing. The New Businesses segment offers third-party logistics, overseas business, tech projects, asset management, and property sales.
Its annualized dividend rate of $0.62 per share translates to a dividend yield of 2.44% on the current share price. Its four-year average yield is 1.01%.
JD’s trailing-12-month cash from operations of $8 billion is significantly higher than the industry average of $249.31 million, while its trailing-12-month asset turnover ratio of 1.79x is 81.5% higher than the industry average of 0.99x.
For the fiscal third quarter that ended September 30, 2023, JD’s total net revenues and non-GAAP income from operations increased 1.7% and 11.8% year-over-year to $33.95 billion and $1.52 billion, respectively. Moreover, its free cash flow increased 253.3% from the prior-year quarter to $1.13 billion.
For the same quarter, its non-GAAP net income attributable to the company’s ordinary shareholders and non-GAAP net income per ADS stood at $1.46 billion and $0.92, up 5.9% and 6.9% from the year-ago quarter, respectively.
Street expects JD’s EPS for the fiscal year 2023 (ended December 2023) to increase 17.8% year-over-year to $3, while revenue is expected to increase marginally year-over-year to $150.97 billion. The company surpassed consensus EPS estimates in each of the trailing four quarters and consensus revenue estimates in three of the trailing four quarters.
The stock has gained marginally intraday to close the last trading session at $25.39.
JD’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
JD has a B grade for Growth and Value. It is ranked #11 within the same industry.
Click here to access additional JD ratings (Momentum, Stability, Sentiment, and Quality).
Stock #1: Alibaba Group Holding Limited (BABA)
Headquartered in Hangzhou, China, BABA is a leading technology company specializing in e-commerce, retail, Internet, and technology. The company operates through seven segments: China Commerce; International Commerce; Local Customer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others.
On January 9, BABA launched its latest AI-powered global sourcing tool, Smart Assistant features, at CES in Las Vegas, NV, from January 9 to 12. The tool caters to newcomers and experienced entrepreneurs looking to navigate the dynamic landscape of global commerce.
The Smart Assistant updates will help business owners adeptly enhance their supply chain and solve complex sourcing needs and challenges as they seek to stand out in today's competitive marketplace. The tool provides an added edge to small business owners to discover fresh opportunities, stay up-to-date on the latest trends, seamlessly track orders, and more in a single, efficient touchpoint.
During the quarter that ended September 30, 2023, BABA repurchased approximately 18.6 million ADSs (the equivalent of 148.4 million ordinary shares) for approximately US$1.7 billion under its share repurchase program. As of September 30, 2023, it had roughly 20.3 billion ordinary shares (the equivalent of 2.5 billion ADSs) outstanding and $14.6 billion remaining under the current share buyback program authorized by the board, which is effective through March 2025.
Its annualized dividend rate of $1 per share translates to a dividend yield of 1.38% on the current share price. Its four-year average yield is 0.02%.
BABA’s trailing-12-month cash from operations of $29.22 billion is significantly higher than the industry average of $249.31 million. Its trailing-12-month EBIT and net income margins of 14.66% and 14.50% are 92.9% and 223.7% higher than the industry averages of 7.60% and 4.48%, respectively.
For the fiscal second quarter that ended September 30, 2023, BABA’s revenue and income from operations increased 8.5% and 33.6% year-over-year to $30.81 billion and $4.60 billion, respectively. Moreover, its adjusted EBITDA stood at $6.75 billion, up 13.7% from the prior-year quarter.
For the same quarter, its non-GAAP net income and non-GAAP earnings per ADS increased 18.8% and 21% from the year-ago quarter to $5.51 billion and $2.14, respectively.
Analysts expect BABA’s revenue for the fiscal third quarter of 2023 (ended December 2023) to increase 3.3% year-over-year to $37.08 billion. Its EPS is expected to be $2.70 for the same quarter. The company surpassed consensus EPS estimates in each of the trailing four quarters.
The stock has gained 1.4% intraday to close the last trading session at $72.38. Over the past month, it has gained 1.4%.
BABA’s POWR Ratings reflect a robust outlook. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has a B grade for Momentum and Quality. It is ranked #9 within the same industry.
Beyond what we’ve stated above, we have also rated the stock for Growth, Value, Stability, and Sentiment. Get all ratings of BABA here.
What To Do Next?
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BABA shares fell $0.25 (-0.35%) in premarket trading Friday. Year-to-date, BABA has declined -6.62%, versus a 0.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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