Amid macroeconomic challenges, China's economic recovery is gathering strength as we move through the second half of 2024. Hence, investors could consider buying fundamentally sound Chinese stocks Alibaba Group Holding Limited (BABA), JD.com, Inc. (JD), and NetEase, Inc. (NTES) as the economy rebounds.
The Chinese economy grew by 4.7% year-on-year in the second quarter of 2024 despite a persistent property downturn, weak domestic demand, falling yuan, and trade frictions with Western countries.
China has emerged as a major driver of global innovation, significantly increasing its research and development expenditure and leading in patent applications. The country is on track to achieve its growth target of 5% in 2024. In addition, China's position as the world's second-largest economy ensures that it remains a key player on the global economic stage.
Considering these encouraging trends, let’s take a look at the fundamentals of the three best China industry stocks.
Stock #3: Alibaba Group Holding Limited (BABA)
Based in Hangzhou, China, BABA provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses engage internationally with their users and customers.
On July 23, BABA reported that its generative AI toolkit, “Aidge,” is now used by 500,000 merchants and has seen API calls double every two months. The AI tools have enhanced over 100 million product listings, boosting operational efficiency and market reach across e-commerce platforms.
In terms of the trailing-12-month EBIT margin, BABA’s 14.74% is 88.4% higher than the 7.82% industry average. Its 13.04% trailing-12-month levered FCF margin is 136.7% higher than the 5.51% industry average. Likewise, the stock’s 8.50% trailing-12-month net income margin is 84.1% higher than the 4.62% industry average.
For the fourth quarter that ended March 31, 2024, BABA’s revenue increased 6.6% year-over-year to RMB221.87 billion ($30.73 billion), while its income from operations amounted to RMB14.77 billion ($2.05 billion) billion for the quarter.
BABA’s non-GAAP net income and EPS came in at RMB24.42 billion ($3.38 billion) and RMB1.27 for the quarter, respectively. Furthermore, the company’s adjusted EBITDA was RMB30.81 billion ($4.27 billion) for the quarter.
Analysts expect BABA’s revenue for the fiscal year (ending March 2026) to increase 7.9% year-over-year to $153.87 billion. Its EPS for the same period is expected to grow 12.1% year-over-year to $9.44. Furthermore, BABA surpassed the consensus revenue estimates in three of the trailing four quarters.
Over the past six months, the stock has gained 13.3%, closing the last trading session at $80.91.
BABA’s POWR Ratings reflect its outlook. 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, with each factor weighted to an optimal degree.
The stock has a B grade for Momentum and Quality. It is ranked #13 in the 41-stock B-rated China industry.
Beyond what is stated above, we’ve also rated BABA for Growth, Sentiment, Stability, and Value. Get all BABA ratings here.
Stock #2: JD.com, Inc. (JD)
Headquartered in Beijing, 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 93.4% higher than the 0.99x industry average. Likewise, the stock’s trailing-12-month cash per share of $7.40 is 193.6% higher than the $2.52 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 (ended June 2024) to increase 3.4% year-over-year to $40.81 billion. Its EPS for the same quarter is projected to grow 17.2% from the prior year’s period to $0.87. Moreover, the company has topped consensus revenue and EPS estimates in each of the trailing four quarters.
Shares of JD have gained 13.9% over the past six months to close the last trading session at $26.07.
JD’s POWR Ratings reflect bright prospects. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.
JD has an A grade for Growth and a B for Value and Sentiment. It is ranked #6 in the same industry.
In addition to the POWR Ratings highlighted above, one can access JD’s ratings for Momentum, Quality, and Stability here.
Stock #1: 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 the 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 22.8% and 58.5% higher than the 50.42% and 18.37% industry averages, respectively. Its trailing-12-month ROTA of 15.53% compares with the industry average of 1.45%.
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 $1.87 for the fiscal third quarter (ending September 2024) represents a 1.8% improvement year-over-year. The consensus revenue estimate of $4 billion for the same quarter indicates a 6.2% 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 three months, the stock has plunged 9.1% to close the last trading session at $89.55.
NTES’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
NTES has a B grade for Value, Stability, and Quality. It is ranked #5 in the same industry.
Click here to access the additional NTES ratings (Growth, Momentum, and Sentiment).
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.
BABA shares were trading at $81.19 per share on Tuesday afternoon, up $0.28 (+0.35%). Year-to-date, BABA has gained 7.00%, versus a 14.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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