3 China Stocks Smart Money Is Following

China’s economy grew at a faster pace than expected in the first quarter of 2023, and predictions point to steady growth in the second. In addition, the nation seems to be on track to become the world’s largest economy in the coming years.

Therefore, it could be wise to invest in fundamentally sound China stocks X Financial (XYF), China Automotive Systems, Inc. (CAAS), and Sunlands Technology Group (STG), which have been gaining significant institutional investment traction lately. Let’s understand this in detail.

While global counterparts witnessed slower growth as central banks raised interest rates to contain persistently high inflation, China’s first-quarter Gross Domestic Product (GDP) surged by 4.5% year-over-year, exceeding expectations of 4%. On a quarter-over-quarter basis, the economy grew by 2.2%.

While the latest economic data showed a slow but steady recovery, with manufacturing, investment, and trade all experiencing decelerated growth, Chinese Premier Li Qiang still believes the nation is still on track to meet its 5% annual growth target. He predicts that growth will pick up in the second quarter and be faster than it was in the first.

By the end of the next ten years, emerging-market stocks are expected to account for a larger portion of the global stock market. Goldman Sachs (GS) economists forecast that emerging markets, which include nations such as China and India, would make up 35% of global stock market value by 2030, 47% by 2050, and 55% by 2075.

Faster income growth in emerging nations will be a major factor in the transition, causing them to catch up and eventually displace the United States in terms of market share. This boom is expected to be led mainly by China, whose economy is forecast to overtake the United States as the world's largest by 2035.

Given the backdrop, it could be wise to invest in sound China stocks XYF, CAAS, and STG, which are now followed by smart money.

Let’s now discuss in detail what makes these stocks worthwhile investments.

X Financial (XYF)

Headquartered in Shenzhen, China, XYF offers personal finance services as an online marketplace connecting borrowers and investors. It provides Xiaoying housing loans to property owners, investment products through the Xiaoying wealth management platform, insurance products, and loan facilitation services to other platforms.

Three institutions added new positions in XYF, owning 43,294 shares in total.

XYF’s trailing-12-month EBITDA margin of 28.95% is 40.3% higher than the 20.63% industry average. The stock’s trailing-12-month ROCE of 20.86% is 87.8% higher than the 11.10% industry average. Moreover, its trailing-12-month asset turnover ratio of 0.42x compares to the industry average of 0.20x.

For the first quarter that ended March 31, 2023, XYF’s financing income increased 9.9% year-over-year to $36.99 million. Its net revenue rose 13.1% from the year-ago value to $146.33 million. Furthermore, the company’s adjusted net income and adjusted net income per ADS grew 99.2% and 131.1% year-over-year to $44.63 million and $0.91, respectively.

The stock has gained 15.3% over the past month and 63.1% over the past year to close the last trading session at $4.38.

XYF’s strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

XYF has an A grade for Value and a B for Growth and Sentiment. It is ranked #3 in the B-rated 45-stock China industry.

In addition to the POWR Ratings I’ve just highlighted, you can see XYF’s ratings for Quality, Stability, and Momentum here.

China Automotive Systems, Inc. (CAAS)

CAAS, based in Jingzhou, China, manufactures and sells automotive systems and components. It produces steering gears for diverse vehicle types. The company also provides automotive motors, electromechanical integrated systems, polymer materials, and intelligent automotive technology research and development (R&D) services.

Fifteen institutions have added new positions in CAAS, holding nearly 395,761 shares.

On November 29, 2022, CAAS announced an extended collaboration with the largest Chinese EV producer, BYD Auto, for future autonomous driving. As autonomous driving becomes the next chapter for manufacturers worldwide, CAAS could extend its advantage in smart vehicles for the future by collaborating with BYD.

With its industry-leading positions in electric power steering systems, electric motors, and electric control software, the company would offer a comprehensive solution to enable top OEMs like BYD to launch cutting-edge experiences on the market. Such strategic alliances could boost the company’s reputation and expansion prospects.

CAAS’ trailing-12-month net income margin of 5.24% is 24.8% higher than the 4.20% industry average. Its stock’s trailing-12-month ROTA of 3.86% is 6% higher than the 3.64% industry average. Moreover, its trailing-12-month CAPEX/Sales of 4.19% is 30.1% higher than the industry average of 3.20%.

For the first quarter that ended March 31, 2023, CAAS’ net product sales increased 4.3% year-over-year to $142.24 million. Its gross profit grew 46.7% year-over-year to $21.62 million. Also, the company’s income from operations came in at $7.74 million, compared to a loss of $1.54 million in the prior year’s quarter.

Moreover, net income attributable to the parent company’s common shareholders stood at $6.82 million, compared to a loss of $59 thousand in the prior year’s quarter, respectively.

Analysts expect CAAS’ revenue to grow 7% year-over-year to $566.71 million for the fiscal year 2023. The company’s revenue for the fiscal year 2024 is estimated to come in at $593.11 million, a 4.7% year-over-year improvement. Moreover, the company’s EPS is expected to grow 10% per annum over the next five years.

Over the past year, the stock has gained 99.6% to close the last trading session at $5.49.

CAAS’ positive outlook is reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.

CAAS has an A grade for Growth and Value and a B for Sentiment. It is ranked #4 out of 45 stocks within the China industry.

Click here to access additional CAAS ratings (Stability, Quality, and Momentum). 

Sunlands Technology Group (STG)

STG, headquartered in Beijing, China, delivers online education services through online and mobile platforms. Its offerings include degree- and diploma-oriented post-secondary courses and professional certification preparation courses in various industries and professions.

Three institutions added new positions in STG, owning 48,047 shares in total.

STG’s trailing-12-month gross profit margin of 85.96% is 143.9% higher than the 35.24% industry average. Additionally, the stock’s trailing-12-month EBITDA margin of 29.56% is 177.5% higher than the 10.65% industry average. Furthermore, its trailing-12-month levered FCF margin of 7.32% compares to the industry average of 3.61%.

During the first quarter that ended March 31, 2023, STG’s income from operations rose 4.2% year-over-year to $25.92 million. Its net income increased marginally year-over-year to $26.23 million. In addition, as of March 31, 2023, STG’s cash and cash equivalents stood at $104.59 million, while its current assets amounted to $137.73 million.

Shares of STG have gained 9.9% over the past month to close the last trading session at $3.79.

STG’s robust outlook is apparent in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our pro­­­­­­­­­prietary rating system.

STG has an A grade for Value and Quality and a B for Sentiment. It has ranked #3 within the same industry.

Click here to access additional STG ratings for Stability, Growth, and Momentum.

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XYF shares were trading at $4.31 per share on Thursday morning, down $0.07 (-1.60%). Year-to-date, XYF has gained 42.72%, versus a 15.41% 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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