Analyzing the Potential of 3 China Stocks - Buy, Hold, or Sell?

China's proficient management of prior economic hurdles is a pillar of constancy in the global economy. The country's third-quarter economic growth outstripped predictions, propelled by robust policy support, signifying Beijing's preparedness to achieve its approximately 5% growth target for the year.

Given this backdrop, I believe New Oriental Education & Technology Group Inc. (EDU) and X Financial (XYF) are strong candidates to invest in, given their robust growth and profitability. Conversely, waiting for a better entry point in H World Group Limited (HTHT) might be prudent.

China, the world's second-largest economy, exhibited resilience and rebounded soon after the stringent pandemic measures were relaxed in the first quarter of 2023. Yet, the eagerly awaited post-COVID resurgence had been subdued as the nation grappled with numerous economic complications like a deflation, youth unemployment crisis, slumping trade, and an escalating property crisis. The debt mountain that has significantly heightened investors' concerns is adding fuel to the fire.

Despite these conundrums, China's economy surpassed estimates in the third quarter, with September recording unexpected upswings in consumer consumption and industrial activity. These indicators signal that recent policies have been productive in bolstering a recovery, suggesting a faster-than-projected growth path.

For the July-September quarter, China's GDP grew by 4.9% year-over-year, outpacing 4.4% growth predictions. The third-quarter GDP increased by 1.3% quarter-by-quarter, a significant acceleration from the prior quarter and beyond the expected 1% expansion. Additionally, China's industrial output and retail sales witnessed annual growth rates of 4.5% and 5.5% in September, surpassing analysts' forecasts.

Moreover, to invigorate the economy, China authorized a 1 trillion yuan ($137 billion) sovereign bond issuance and allowed local governments to expedite part of their 2024 bond allotments.

China continues heading steadily toward the government's 5% growth target for 2023. Notably, the IMF has raised China's economic growth forecast in 2023 to 5.4%. Citigroup Inc. (C) anticipates a 5.3% GDP growth in 2023, while JP Morgan Chase & Co. (JPM) and Nomura Holdings, Inc (NMR) predict growth rates of 5.2% and 5.1%, respectively.

Considering these conducive trends, let's take a look at the fundamentals of the three China stocks, starting with number 3.

Stock #3: H World Group Limited (HTHT)

Headquartered in Shanghai, the People's Republic of China, HTHT develops leased and owned, manachised, and franchised hotels primarily in the People's Republic of China.

In November, HTHT’s board of directors approved the declaration and payment of a dividend of $0.093 per ordinary share, or $0.93 per ADS. The dividend comprises an ordinary dividend of $0.062 per ordinary share, or $0.62 per ADS and a special dividend of $0.031 per ordinary share, or $0.31 per ADS. The company contemplates announcing an ordinary dividend annually up to 45% of its net income.

HTHT’s trailing-12-month cash from operations of $863.85 million is 261.1% higher than the industry average of $239.22 million. Its trailing-12-month levered FCF margin of 22.28% is 332.3% higher than the industry average of 5.15%.

Its revenue and EBITDA have grown at CAGRs of 25.9% and 106.4% over the past three years, respectively. Its total assets and levered FCF have improved at CAGRs of 21.1% and 35.2% over the past five years, respectively.

In the fiscal third quarter that ended September 30, 2023, HTHT’s total revenue increased 53.6% year-over-year to $861 million, while its income from operations grew 281.8% from the year-ago quarter value to $262 million.

Additionally, net income attributable to HTHT and earnings per ADS stood at $183 million and $0.56, respectively. As of September 30, 2023, its total current assets came at $1.48 billion, compared to $1.35 billion as of September 30, 2022.

Street expects HTHT’s EPS in the fiscal year ending December 2023 to be $1.93, while revenue is expected to increase 50.5% year-over-year to $3.03 billion.

The stock has gained marginally intraday to close the last trading session at $36.17.

HTHT’s POWR Ratings reflect its prospects. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an A grade for Growth and a B for Sentiment. Within the B-rated China industry, it is ranked #24 out of 41 stocks.

To see additional POWR Ratings for Value, Momentum, Stability, and Quality for HTHT, click here.

Stock #2: New Oriental Education & Technology Group Inc. (EDU)

Headquartered in Beijing, the People's Republic of China, EDU provides private educational services under the New Oriental brand in the People's Republic of China. The company operates through four segments: Educational Services and Test Preparation Courses; Online Education and Other Services; Overseas Study Consulting Services; and Educational Materials and Distribution.

EDU’s trailing-12-month cash from operations of $1.12 billion is 368.8% higher than the industry average of $239.22 million. Its trailing-12-month CAPEX/Sales of 8.22% is 162.7% higher than the industry average of 3.13%.

Its revenue and EBITDA have grown at CAGRs of 4.9% and 4% over the past five years, respectively. Its levered FCF has improved at CAGRs of 16.1% and 1.6% over the past three and five years, respectively.

As of October 24, 2023, the company repurchased an aggregate of approximately 6 million ADSs for approximately $193.3 million from the open market under the share repurchase program.

In the fiscal first quarter that ended on August 31, 2023, EDU’s net revenues increased 47.7% year-over-year to $1.10 billion, while its non-GAAP operating income grew 152.2% from the year-ago quarter value to $244.76 million.

Additionally, non-GAAP net income attributable to EDU and non-GAAP net income per ADS rose 126.2% and 135.4% from the prior-year quarter to $189.32 million and $1.13, respectively.

EDU expects total net revenues in the second quarter of the fiscal year 2024 (ending November 30, 2023) to be between $785 million and $804.2 million, representing a year-over-year increase between 23% and 26%.

For the fiscal second quarter ending November 2023, analysts expect EDU’s revenue and EPS to increase 27.1% and 170.4% year-over-year to $810.89 million and $0.27, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters and revenue estimates in all the trailing four quarters, which is impressive.

The stock has surged 169.9% over the past year to close the last trading session at $81.31. Over the past nine months, it gained 79.5%.

EDU’s POWR Ratings reflect its robust prospects. The stock has an overall B rating, equating to Buy in our proprietary rating system.

The stock has a B grade for Growth, Sentiment, and Quality. Within the same industry, it is ranked #19.

Click here for the additional POWR Ratings for EDU (Value, Momentum, and Stability).

Stock #1: X Financial (XYF)

XYF provides personal finance services in China. The company offers services as an online marketplace connecting borrowers and investors. Its loan products include Xiaoying credit loan, which consists of Xiaoying card loan; Xiaoying preferred loan to small business owners, and Xiaoying revolving loan.

XYF’s trailing-12-month ROCE, ROTC, and ROTA of 24.83%, 17.03%, and 11.40% are 114.2%, 166.7%, and 890.2% higher than the industry averages of 11.59%, 6.39%, and 1.15%, respectively. Its trailing-12-month asset turnover ratio of 0.46x is 118.8% higher than the industry average of 0.21x.

Its revenue has grown at CAGRs of 28.8% and 6.1% over the past three and five years, respectively. Its total assets have improved at CAGRs of 11.1% and 21.6% over the same periods.

In the third quarter of 2023, the company repurchased 395,962 ADSs for $1.73 million and an aggregate of 801,807 ADS year-to-date for $3.31 million. XYF has approximately $5.6 million remaining for potential repurchases under its current plan.

For the fiscal third quarter that ended on September 30, 2023, XYF’s total net revenue increased 56.1% year-over-year to $191.46 million, while its income from operations grew 44.7% from the year-ago value to $59.59 million.

Additionally, the company’s non-GAAP adjusted net income and non-GAAP adjusted net income per share rose 62% and 80% from the prior-year quarter to $51.33 million and $0.17, respectively.

The stock has surged 80.9% over the past year and 33.7% over the past nine months to close the last trading session at $3.96.

It’s no surprise that XYF has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.

It has an A grade for Value and a B for Growth, Stability, and Sentiment. In the same industry, it is ranked first.

In addition to the POWR Ratings we’ve stated above, we also have XYF’s ratings for Momentum and Quality. Get all XYF ratings here.

What To Do Next?

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HTHT shares were unchanged in premarket trading Tuesday. Year-to-date, HTHT has declined -14.73%, versus a 20.74% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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