Investing in Chinese tech stocks has always been a game of high stakes, offering substantial returns alongside significant risks. As some of the world's largest and most innovative companies, China’s tech giants like Alibaba Group Holding Limited (BABA), Tencent Holdings Limited (TCEHY), and JD.com, Inc. (JD), could be ideal stock picks for potential returns.
In recent years, the Chinese government’s raised regulatory scrutiny, aimed at curbing monopolistic practices and promoting “common prosperity.” This crackdown led to steep fines, restrictions, and even the restructuring of some of the nation’s largest tech firms. However, China’s regulators are now softening on its technology sector.
Meanwhile, U.S.-China relations remain tense, adding risk to Chinese companies listed on U.S. exchanges. Despite these challenges, the underlying growth potential of these companies remains strong, particularly as they continue to innovate and expand into new markets.
For investors with a high-risk tolerance, the potential rewards of investing in Chinese tech stocks can be compelling. Amid this backdrop, Chinese tech giants such as BABA, TCEHY, and JD, global powerhouses driving advancements in e-commerce, cloud computing, gaming, and more, could be solid investments now for substantial gains.
Given these favorable trends, let’s look at the fundamentals of the three top China stock picks, beginning with the third choice.
Stock #3: Alibaba Group Holding Limited (BABA)
BABA, based in Hangzhou, China, offers merchants, retailers, and other businesses with technology infrastructure and marketing reach for enhanced user and customer engagement. It operates in China Commerce; International Commerce; Local Consumer Services; Cainiao; Cloud; Digital Media and Entertainment; Innovation Initiatives; and Other segments.
On July 23, BABA’s Alibaba International Digital Commerce Group announced that its generative AI toolkit, “Aidge,” had been adopted by around 500,000 merchants, with its average daily application programming interface (API) calls doubled every two months, surpassing 50 million.
More than 100 million product listings on Alibaba International’s platforms have been thoroughly refined and adapted into multiple languages using AI, helping merchants expand their market reach and boost purchase conversion.
During the quarter that ended June 30, 2024, BABA’s revenue increased 3.9% year-over-year to RMB234.16 billion ($32.88 billion). Its income from operations was RMB35.99 billion ($5.05 billion) for the quarter. The company’s non-GAAP net income and EPS came in at RMB40.69 billion ($5.71 billion) and RMB2.05, respectively.
Analysts expect BABA’s revenue and EPS for the fiscal year (ending March 2025) to increase 8.8% and 2.1% year-over-year to $141.61 billion and $8.78, respectively. Moreover, BABA’s stock has gained 9.9% over the past month to close the last trading session at $82.27.
BABA’s POWR Ratings reflect promising prospects. The stock 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.
The stock has a B grade for Sentiment, Momentum, and Quality. It is ranked #13 out of 41 stocks in the B-rated China industry. To see BABA’s Growth, Value, Stability, and Sentiment ratings, click here.
Stock #2: Tencent Holdings Limited (TCEHY)
Based in Shenzhen, China, TCEHY is an investment holding company that provides value-added services (VAS), online advertising, fintech, and business services globally. The company operates through VAS; Online Advertising; FinTech and Business Services; and Other segments.
On July 27, TCEHY unveiled Microcosm, the largest virtual urban historical landscape ever created, offering an immersive online experience that brings Beijing’s Central Axis to life online. The launch of this project coincides with the Central Axis being added to the World Heritage List by the United Nations Educational, Scientific and Cultural Organization (UNESCO).
On May 28, TCEHY launched Oracle Bones Corpus, an online research platform and database designed for Oracle bone researchers and enthusiasts. The updated website features innovative tools for visualizing shallow indentations and leverages AI to improve the efficiency of mapping glyphs to modern Chinese characters.
In the second quarter that ended March 31, 2024, TCEHY’s total revenues increased 8% year-over-year to RMB161.12 billion ($22.60 billion). Its gross profit grew 21.3% from the prior year’s quarter to RMB85.90 billion ($12.10 billion). Its non-IFRS operating profit came in at RMB58.44 ($8.20 billion), up 26.9% from the year-ago value.
In addition, non-IFRS profit attributable to equity holders of the company grew 52.6% year-over-year to RMB57.30 billion ($8 billion). Its non-IFRS earnings per share for profit attributable to equity holders of the company rose 85.3% from the previous year’s quarter to RMB6.01.
Street expects TCEHY’s revenue and EPS for the third quarter (ending September 2024) to increase 10.1% and 37.6% year-over-year to $23.48 billion and $0.88, respectively. Further, the company has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 37.8% over the past six months and 14.5% over the past year to close the last trading session at $48.14.
TCEHY’s bright outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
TCEHY has an A grade for Sentiment and Stability. It is ranked #5 out of 41 stocks within the B-rated China industry.
Beyond what is stated above, we’ve also rated TCEHY for Growth, Value, Momentum, and Quality. Get all TCEHY ratings here.
Stock #1: JD.com, Inc. (JD)
Headquartered in Beijing, JD provides supply chain-based technologies and services in China. The company offers computers, communication, and consumer electronics products, as well as home appliances and general merchandise products comprising food, baby and maternity products, furniture, and household goods.
On August 27, JD’s Board of Directors approved a new share repurchase program, effective September 2024. Under the new share repurchase program, the company may repurchase up to $5 billion worth of shares (including ADSs) over the next 36 months through the end of August 2027.
For the first quarter, which ended on March 31, 2024, JD’s net revenues increased 1.2% year-over-year to $40.10 billion. The company’s non-GAAP income from operations rose 33.3% from the prior year’s quarter to $2 billion. Also, non-GAAP net income attributable to the company’s ordinary shareholders was $2 billion, up 68.6% from the prior year’s quarter.
Furthermore, the company’s non-GAAP net income per ADS was $1.29, an increase of 73.7% year-over-year.
Analysts expect JD’s revenue and EPS for the third quarter (ending September 2024) to increase 6.8% and 12% year-over-year to $36.51 billion and $1.04, respectively. In addition, the company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
Over the past six months, JD’s stock has surged 22.6% to close the last trading session at $26.70.
JD’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system.
JD has an A grade for Sentiment and a B for Growth and Value. It is ranked #4 among 41 stocks in the B-rated China industry.
Beyond what we have stated above, we have also rated JD for Momentum, Stability, and Quality. Get all the JD’s POWR ratings here.
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 $82.49 per share on Wednesday afternoon, up $0.22 (+0.27%). Year-to-date, BABA has gained 8.71%, versus a 16.55% 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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