Alibaba (BABA) vs. Trip.com (TCOM) - Analyzing the Gain Potential of China Stocks

China's economic growth could accelerate in the near future, buoyed by the gradual implementation of various stimulus measures. Therefore, I assessed two China stocks Alibaba Group Holding Limited (BABA) and Trip.com Group Limited (TCOM), to determine which has the potential for greater gains at the moment.

Let’s understand this in more detail.

China's economy exceeded forecasts, recording a 4.9% growth in the third quarter. Moreover, September witnessed unexpected upturns in consumption and industrial activity. The region's economic resilience was fueled by robust domestic demand, heightened remittances, and a tourism rebound, fostering sustained and dynamic growth.

Yet, the economic landscape is marred by volatility, persistent deflationary pressures, and lingering consumer confidence weaknesses. In response, China has pledged to fortify fiscal policy in 2024, aiming to invigorate its ailing economy and counteract the prevailing challenges.

In the most recent meeting chaired by President Xi Jinping and attended by the influential 24-member Politburo, officials pledged to intensify efforts to expand domestic demand while stabilizing foreign trade and investment.

Meanwhile, China's government advisers indicate a recommended economic growth target for 2024 between 4.5% and 5.5%, with a prevailing preference for around 5%, mirroring this year's target.

Furthermore, the Asian Development Bank (ADB) asserts that Asia's anticipated growth could surpass earlier expectations, primarily driven by China's economic recovery. The ADB has raised its growth projection for China to 5.2% from the previous 4.9% while maintaining the forecast for the world's second-largest economy at 4.5% for the next year.

In terms of price performance, BABA has declined 13.1% over the past month, while TCOM plunged 4.9% during the same period. Moreover, BABA witnessed an 18.3% plunge over the past six months, while TCOM plummeted 7.5% over the same duration.

However, BABA declined 21.8% over the past year, closing the last trading session at $71.46, whereas TCOM has marginally gained during the same period, closing the last trading session at $33.48.

But which China stock could be a better pick? Let's find out.

Recent Developments

On December 13, it was reported that BABA's e-commerce platforms have evolved into crucial channels for European enterprises aiming to broaden their global sales. With Europe being a pivotal market for BABA's international ventures, AliExpress, launched in 2010, strategically targets growth in Europe and South Korea.

This year, AliExpress introduced a new service promising nine-day delivery times for European customers, amplifying its competitive advantage. The geographical expansion is anticipated to fortify BABA's market presence and enhance revenue streams.

On November 25, TCOM strategically positioned itself for growth by signing a framework agreement with the China International Culture Association to implement the "Nihao! China" program. This initiative, featuring global promotional videos showcasing China's travel appeal, is expected to boost inbound tourism.

As favorable policies persist, TCOM stands to benefit significantly, seizing new development opportunities in the inbound tourism industry and augmenting its service capabilities.

Recent Financial Results

For the second quarter that ended September 30, 2023, BABA’s revenue increased 8.5% year-over-year to $30.81 billion. Its adjusted EBITDA grew 13.7% from the year-ago value to $6.75 billion. Also, the company’s non-GAAP net income and non-GAAP EPS rose 18.8% and 21.1% from the prior year’s period to $5.51 billion and $0.27, respectively.

For the third quarter that ended September 30, 2023, TCOM’s net revenue grew 99.4% year-over-year to $1.88 billion. Also, non-GAAP net income attributable to TCOM and non-GAAP income per share rose 373.1% and 359.5% from the prior year’s period to $673 million and $1.00, respectively. However, the company’s total operating expenses widened 54.5% from the year-ago value to $1.01 billion.

Past and Expected Financial Performance

Over the past three years, BABA’s revenue and EBITDA increased at a CAGR of 16.1% and 8%, respectively. In addition, its tangible book value and total assets grew at a CAGR of 11.5% and 8.1%, respectively, over the same time frame.

Analysts expect BABA’s revenue to increase 8% year-over-year to $133.28 billion for the fiscal year ending March 2024. Similarly, the company’s EPS for the current year is expected to grow 16.3% from the prior year to $9.01 billion.

TCOM’s revenue and EBITDA increased at 21.8% and 201.7% CAGRs, respectively, over the past three years. Furthermore, its tangible book value and total assets rose at a CAGR of 25.3% and 4.7%, respectively during the same period.

For the fiscal year ending December 2023, TCOM’s revenue is expected to increase 113.8% year-over-year to $6.18 billion. Additionally, the company's EPS for the current year is expected to be $2.38, up 735.7% from the previous year.

Valuation

In terms of trailing-12-month Price/Sales, BABA is trading at 1.47x, 63.9% lower than TCOM, which is trading at 4.07x. Moreover, BABA’s trailing-12-month EV/Sales of 1.19x compares with TCOM’s 3.75x. Furthermore, BABA’s trailing-12-month EV/EBITDA of 6.04x is 60.3% lower than TCOM’s 15.23x.

Thus, BABA is more affordable.

Profitability

BABA’s trailing-12-month revenue is 23.3 times that of what TCOM generates. Moreover, BABA is more profitable, with a trailing-12-month levered FCF margin of 14.17%, compared to TCOM’s 6.12%. Also, BABA’s trailing-12-month ROCE and ROTA of 11.32% and 6.53% compare with TCOM’s 9.16% and 3.23%, respectively.

POWR Ratings

BABA has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, TCOM has an overall rating of C, translating to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories.

Both the stocks have a B grade for Quality. However, BABA outshines with superior profitability, compared to TCOM. BABA’s trailing-12-month cash from operations of $29.22 billion is significantly higher than the industry average of $246.19 million, while TCOM’s trailing-12-month cash from operations of $382.92 million is 55.5% higher than the industry average.

Of the 41 stocks in the A-rated China industry, BABA is ranked #10, while TCOM is ranked #25. 

Beyond what we've stated above, we have also rated both stocks for Growth, Value, Momentum, Stability, and Sentiment. Click here to view BABA’s ratings. Get all TCOM ratings here.

The Winner

While both BABA and TCOM could benefit from the nations’ improving landscape, BABA stands out as a superior investment choice compared to TCOM. BABA boasts superior financial performance, heightened profitability, and a more attractive valuation, making it a compelling buy in the current landscape.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the China industry 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.

2024 Stock Market Outlook >

BABA shares were trading at $73.00 per share on Thursday morning, up $1.54 (+2.16%). Year-to-date, BABA has declined -17.13%, versus a 24.78% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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