Last year, the world’s second-largest economy grew by 5.2%, surpassing its economic growth target of 5%, marking the country’s most sluggish annual pace since 1990. Moreover, China appears to be facing major setbacks, including a troubled property market, sluggish exports, and deflationary pressures.
Nevertheless, the recent tourism data and stimulus measures could brighten the country’s future. Given the optimism, investing in the shares of three fundamentally sound Chinese stocks, Youdao, Inc. (DAO), Ping An Insurance (Group) Company of China, Ltd. (PNGAY), and Tuniu Corporation (TOUR), could yield potential gains.
Before we dive deeper into the fundamentals of the highlighted stocks, let’s briefly examine China’s prevailing economic scenario.
In addition to a sluggish growth rate in 2023, uncertainty looms large for consumers and businesses in China following crackdowns on various sectors like internet technology, gaming, after-school education, and real estate. Adding to the unease are escalating tensions between the United States and China over tech competition.
However, anticipation for increased support from China to bolster its economy and stock markets is on the rise, especially in the wake of its central bank's easing initiatives. The People's Bank of China's decision to lower the reserve requirement ratio (RRR) by 50 basis points is poised to inject a staggering 1 trillion yuan ($140.41 billion) in long-term capital, setting the stage for a potential economic upswing.
On top of it, Chinese authorities are eyeing a massive injection of funds from state-owned enterprises, totaling about 2 trillion yuan ($280 billion), to bolster market stability.
Moreover, yesterday revealed a remarkable 47.3% year-on-year spike in tourism revenues in China during the Lunar New Year holidays, surpassing 2019 levels. Additionally, the number of domestic trips taken during this year's holiday increased by 34.3% from the previous year, reaching a total of 474 million.
This surge, fueled by an extended holiday period, provided momentary respite to policymakers amid concerns over deflationary risks and sluggish consumer demand.
Fueled by the upbeat travel and tourism data, Chinese stocks are set for a positive start as traders return from the Lunar New Year break. Mainland China trading was closed from February 9 to February 16, during which offshore Chinese shares, like those in Hong Kong, saw gains of nearly 5%.
Additionally, the Nasdaq Golden Dragon China Index surged by 4.3% for the week, indicating potential for onshore stocks to catch up with these gains upon resumption of trading.
Considering the bullish outlook for Chinese stocks, coupled with the continued efforts of the country’s policymakers to bolster its economic situation and stabilize the market, investing in the shares of DAO, PNGAY, and TOUR might be a wise move.
To that end, let’s now examine the fundamentals of these China stocks in detail, beginning with number three:
Stock #3: Youdao, Inc. (DAO)
Headquartered in Hangzhou, China, DAO is an internet technology company offering online services in the field of content, community, communication, and commerce in China. It operates through three segments: Learning Services; Smart Devices; and Online Marketing Services.
On November 16, 2023, DAO’s Chief Executive Officer and Director, Dr. Feng Zhou, while commenting on the company’s third-quarter performance, highlighted that the company's learning services, smart devices, and online marketing services are benefiting from advancements in AI technology. These advancements have led to record-high net revenues in the third quarter.
Notable achievements during this period include the introduction of Hi Echo, the world's first digital human language coach, aimed at improving English-speaking skills. Additionally, the launch of AI quiz recommendations and other features has driven historically high gross margins for digital content services.
Leveraging AI technology has also enabled the provision of more personalized solutions to users, resulting in all-time high net revenues from online marketing services.
DAO’s total net revenues for the fiscal third quarter (ended September 30, 2023) rose 9.7% from the year-ago value to RMB1.54 billion ($216.24 million), while its gross profit increased 13.1% from the prior-year quarter to RMB859.64 million ($120.71 million).
Moreover, the company’s total gross margin stood at 55.9%, compared to 54.2% in the prior-year quarter. Also, its total operating expenses declined 6.3% year-over-year to RMB917.30 million ($128.80 million).
Street expects its revenue for the fiscal year ended December 2023 to increase 3.3% year-over-year to $750.11 million, while its EPS for the same period is projected to surge by 22.6% year-over-year.
Moreover, the company topped its revenue estimates in three of the trailing four quarters and EPS estimates in each of the trailing four quarters, which is excellent.
The stock has surged 17% over the past month to close the last trading session at $4.20.
DAO’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth and Value. In the B-rated 41-stock China industry, it is ranked #10. Click here to see DAO’s ratings for Momentum, Stability, Sentiment, and Quality.
Stock #2: Ping An Insurance (Group) Company of China, Ltd. (PNGAY)
Based in Shenzhen, PNGAY provides financial products and services for insurance, banking, asset management, and technology businesses in China. It operates in Life and Health Insurance; property and Casualty Insurance; Banking; Trust; Other Asset Management; and Technology segments.
On January 18, 2024, PNGAY was recognized as China's Most Valuable Insurance Brand by leading brand valuation consultancy Brand Finance, marking the eighth consecutive year it has held this title.
According to Brand Finance's Global 500 Report for 2024, PNGAY boasts a brand value of $44.36 billion, securing the 31st position among the world's most valuable brands. Additionally, it ranks second among insurance brands and sixth among global financial enterprises.
On December 15, 2023, PNGAY was honored with the ESG Excellence Awards 2023 in the category of Main Board Companies. Notably, this marks the second consecutive year that PNGAY has received this prestigious accolade.
For the nine-month period, which ended on September 30, 2023, PNGAY’s total revenue increased 6% year-over-year to RMB792.53 billion ($111.28 billion), while Its insurance revenue grew 2.2% from the prior-year period to RMB404.48 billion ($56.79 billion). The company’s profit for the period stood at RMB108.11 billion ($15.18 billion). In addition, its attributable EPS came in at RMB4.85.
The consensus revenue estimate of $24.66 billion for the fiscal fourth quarter (ended December 2023) represents a 7.7% year-over-year improvement. Meanwhile, the consensus revenue estimate of $114.61 billion for the fiscal year ended December 2023, reflects a 6.6% year-over-year surge. The company surpassed its revenue estimates in three of the trailing four quarters, which is promising.
PNGAY’s shares have climbed 10.4% over the past month to close the last trading session at $8.91.
PNGAY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Growth, Value, and Stability. Within the same B-rated industry, it is ranked #7. Click here to see the other ratings of PNGAY for Sentiment and Quality.
Stock #1: Tuniu Corporation (TOUR)
Headquartered in Nanjing, TOUR operates as an online leisure travel company in China. The company offers various packaged tours, including organized and self-guided tours, and other travel-related services, such as tourist attraction tickets, visa application services, etc.
For the fiscal third quarter, which ended on September 30, 2023, TOUR’s net revenues increased 128.9% year-over-year to RMB178.19 million ($25.02 million), while its gross profit rose 154.9% from the year-ago value to RMB114.77 million ($16.02 million).
Moreover, during the same quarter, its net income and comprehensive income came in at RMB39.07 million ($5.49 million) and RMB37.66 million ($5.29 million) versus a net loss and comprehensive loss of RMB23.50 million ($3.29 million) and RMB5.44 million ($763.85 thousand) in the year-ago quarter, respectively.
Analysts predict TOUR’s revenue and EPS for the fiscal year ended December 2023 to come in at $60.58 million and $0.04, respectively.
The stock has gained 1.1% over the past month to close the last trading session at $0.65.
It’s no surprise that TOUR has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Sentiment and a B for Growth, Value, and Quality. In the same 41-stock industry, it is ranked #6.
In addition to the POWR Ratings we’ve stated above, we also have TOUR’s ratings for Momentum and Stability. Get all TOUR 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.
PNGAY shares were trading at $8.91 per share on Monday afternoon, up $0.29 (+3.36%). Year-to-date, PNGAY has declined -1.22%, versus a 5.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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