China witnessed a post-Covid rebound, with its economy growing by 5.2% last year, and is targeting “around 5%” in 2024. During a keynote speech at this year’s two-day China Development Forum, Chinese Premier Li Qiang pledged efforts to promote high-quality development, intensify macro-policy adjustments, and expand domestic demand.
Given this backdrop, it could be wise to consider buying fundamentally sound China stocks Trip.com Group Limited (TCOM), Youdao, Inc. (DAO), and X Financial (XYF) for potential returns.
Despite broad market concerns such as the ailing real estate market, falling global export demand, poor consumer confidence, and high debt levels, China’s economy is sturdy, with 5.3% growth this year, per a top government think tank.
The Chinese Academy of Sciences (CAS) said the world’s second-largest economy is likely to stabilize in 2024 in its annual economic outlook. The CAS anticipates that China will have a slow start, initially at 5%, with its growth pacing as the year progresses, strongly driven by domestic consumption and investment.
While its property sector continues to suffer, China’s factory output and retail sales surpassed estimates in the January-February period. Retail sales grew 5.5%, higher than the 5.2% rise forecast, while its industrial production rose 7%, compared with the expectations of 5.5% growth. Also, fixed asset investment increased by 4.2%, better than the 3.2% forecast.
Besides, China’s Ministry of Culture and Tourism reported that about 474 million domestic trips were made during the eight-day Lunar New Year festival, reflecting a 34.3% jump from a year earlier. Also, as per the data, tourists spent around RMB 632.7 billion ($87.95 billion) on domestic holiday trips, a 47.3% year-over-year growth.
The notable spike showcases that China’s travel activity and spending have jumped above pre-pandemic levels during the holiday. It further indicates that consumption levels are improving in the world’s prominent economy.
The Chinese economy is taking cautious measures to stimulate growth while refraining from making bold moves. The fiscal deficit has been set at 3% of economic input, the same target as last year. The government increased the previous year’s deficit to 3.8% to allow for additional borrowing, and it has indicated that a similar adjustment could occur again in 2024.
The more the government borrows, the more it can spend on initiatives that could boost the economy.
In light of these encouraging trends, let’s look at the fundamentals of the three best China stocks, beginning with number 3.
Stock #3: Trip.com Group Limited (TCOM)
Headquartered in Shanghai, China, TCOM is a travel service company that offers accommodation reservation, transportation ticketing, packaged tours and in-destination, corporate travel management, and other travel-related services worldwide. The company operates under the Ctrip, Qunar, Trip.com, and Skyscanner brands.
In February 2024, TCOM experienced a significant international and inbound travel surge due to the Lunar New Year activities. Its international travel grew more than ten times with the relaxed visa policies, particularly to Asian destinations. Also, its inbound travel to China increased considerably, making it one of its busiest travel seasons.
On November 25, 2023, TCOM announced an expansion of the scope of its unilateral visa-free policy for ordinary passport holders from six countries: France, Germany, Italy, the Netherlands, Spain, and Malaysia. The new policy has been implemented to facilitate more accessible travel and promote closer ties with the countries involved.
For the fourth quarter that ended December 31, 2023, TCOM’s total revenue rose 105% year-over-year to $1.46 billion. The company's gross profit grew 117.2% from the year-ago value to $1.17 billion. Also, non-GAAP net income attributable to TCOM and non-GAAP EPS came in at $376 million and $0.56, up 437.1% and 426.3% from the prior year’s quarter, respectively.
Furthermore, the company’s adjusted EBITDA increased 898.2% year-over-year to $401 million.
Analysts expect TCOM’s revenue and EPS for the first quarter (ending March 2024) to increase 25.9% and 34.4% year-over-year to $1.62 billion and $0.58, respectively. Moreover, the company has topped consensus revenue estimates in all four trailing quarters, which is impressive.
Shares of TCOM have surged 24.7% over the past six months and 23.7% over the past year to close the last trading session at $44.68.
TCOM’s bright prospects 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.
The stock has an A grade for Sentiment and a B grade for Quality. It is ranked #9 among 40 stocks within the China industry.
To see the other ratings of TCOM for Growth, Value, Momentum, and Stability, click here.
Stock #2: Youdao, Inc. (DAO)
Based in Hangzhou, DAO is an internet technology company offering online services in the field of content, community, communication, and commerce in China. The company operates through three segments: Learning Services; Smart Devices; and Online Marketing Services. It provides online knowledge tools, learning services, STEAM courses, and smart devices.
DAO’s trailing-12-month gross profit margin of 51.35% is 43.5% higher than the industry average of 35.79%. Further, the stock’s trailing-12-month asset turnover ratio of 2.73x is considerably higher than the industry average of 1.00x.
In terms of forward Price/Sales, DAO is trading at 0.56x, 40.1% lower than the industry average of 0.93x. Also, the stock’s forward EV/Sales multiple of 0.73 is 40.9% lower than the industry average of 1.24.
During the fourth quarter that ended December 31, 2023, DAO’s total net revenues increased marginally year-over-year to $208.53 million, of which its online marketing services revenue grew 96.9% year-over-year to $66.78 million. Its gross profit for the quarter came in at $104.06 million.
Additionally, non-GAAP net income from continuing operations attributable to ordinary shareholders of the company increased 122.6% from the prior year’s quarter to $9.76 million.
Street expects DAO’s revenue for the first quarter (ending March 2024) to grow 12% year-over-year to $184.09 million. Also, for the fiscal year 2024, the company’s revenue is expected to increase 14.5% year-over-year to $858.33 million. Also, the company topped the consensus EPS estimates in each of the trailing four quarters.
Over the past six months, DAO’s stock has soared 3.5% to close the last trading session at $3.84.
DAO’s POWR Ratings reflect its bright prospects. The stock has an overall B rating, translating to a Buy in our proprietary rating system.
The stock has a B grade for Sentiment, Growth, and Value. DAO is ranked #4 among 40 stocks within the same industry.
To check other ratings of DAO for Stability, Momentum, and Quality, click here.
Stock #1: X Financial (XYF)
XYF, based in Shenzhen, China, offers personal finance services. It provides services as an online marketplace connecting borrowers and investors. The company’s loan products consist of Xiaoying credit loan, Xiaoying revolving loan, and Xiaoying housing loan. Also, it offers investment products via Xiaoying wealth management platform.
XYF’s trailing-12-month EBIT margin and net income margin of 32.70% and 27.80% favorably compared to the respective industry averages of 22.64% and 23.70%. Similarly, the stock’s trailing-12-month ROCE of 24.83% is 127.1% higher than the industry average of 10.93%.
In terms of trailing-12-month Price/Sales, XYF is trading at 0.36x, 86.2% lower than the industry average of 2.58x. Furthermore, the stock’s trailing-12-month EV/EBITDA multiple of 0.54 is 95.5% lower than the 12.19 industry average. Likewise, its trailing-12-month Price/Book of 0.29x compared to the industry average of 1.12x.
XYF’s net revenue increased 56.1% year-over-year to $191.46 million during the third quarter that ended September 30, 2023. The company’s income from operations rose 44.7% from the year-ago value to $59.59 million. Its non-GAAP adjusted net income came in at $51.33 million and $0.17 per share, up 62% and 80% year-over-year, respectively.
In addition, the company’s cash and cash equivalents were $195.71 million as of September 30, 2023, and its total assets came in at $1.53 billion.
XYF’s stock has gained 13.3% over the past month and 66.7% over the past year to close the last trading session at $4.68.
XYF’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Value and a B for Sentiment, Growth, and Stability. Within the China industry, XYF has topped among 45 stocks.
Click here to access additional ratings of XYF for Momentum and Quality.
What To Do Next?
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TCOM shares rose $0.47 (+1.05%) in premarket trading Tuesday. Year-to-date, TCOM has gained 25.38%, versus a 10.11% 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.
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