Thanks to solid GDP growth and strategic government interventions supporting recovery, China's economy is on the upswing. In light of this, I evaluated two prominent Chinese stocks, Bilibili Inc. (BILI) and LexinFintech Holdings Ltd. (LX), to ascertain which holds the potential to yield superior returns this month. Let's understand this in detail.
The Chinese economy outperformed expectations, expanding rapidly in the fiscal third quarter. GDP increased by 4.9% year-over-year in the July-September period, surpassing the expected 4.4% growth. Third-quarter GDP grew to 1.3% on a quarterly basis, up from 0.5% in the previous quarter and exceeding the predicted 1.0% rise.
The better-than-expected data has led international banks to raise their growth estimates for 2023. JPMorgan Chase & Co. (JPM) raised its estimate from 5% to 5.2%, while Nomura Holdings, Inc. (NMR) raised its forecast from 4.8% to 5.1%. Moody's Analytics has also revised its growth estimate for 2023, increasing it from 4.9% to 5%.
Additionally, the International Monetary Fund (IMF) raised its estimate of China's GDP growth to 5.4% in 2023 from the prior estimate of 5%. Li Daokui, director of the Academic Center for Chinese Economic Practice and Thinking at Tsinghua University, argues that China would witness even more robust economic growth.
He said, “Next year is likely to be an important adjustment year for China’s economy. It is expected that great efforts will be made to stabilize and maintain growth, as well as to remove risks. Therefore, economic growth will see stronger momentum.”
Furthermore, China has approved the additional issuance of 1 trillion yuan ($139.3 billion) in government bonds for the fourth quarter in an effort to support the country's economic recovery. This initiative aims to increase effective demand and create a favorable economic development trajectory for the first half of 2024.
In terms of price performance, BILI has declined by 18.4% in the past month, while LX declined by 4.8% during the same period. Moreover, BILI witnessed a 31.6% plunge over the past six months, while LX plummeted by 15.8% over the same duration.
However, BILI has declined 34.7% over the past year, closing the last trading session at $11.33, whereas LX has plunged 1.7% during the same period, closing the last trading session at $1.78.
But which China stock could be a better pick? Let's find out.
Recent Financial Results
For the fiscal third quarter that ended September 30, 2023, BILI’s adjusted loss from operations came in at $103.50 million. Its adjusted net loss and adjusted net loss per share came in at $118.3 million and $0.29, respectively.
For the fiscal third quarter that ended September 30, 2023, LX’s non-GAAP EBIT increased 30% year-over-year to $72.27 million. Also, adjusted net income and adjusted net income per ordinary share attributable to ordinary shareholders of the company grew 26.2% and 80.5% from the prior year’s quarter to $57.19 million and $0.16, respectively.
Past and Expected Financial Performance
Over the past three years, BILI’s revenue increased at a CAGR of 30%. Its total assets grew at an 11.7% CAGR during the same period.
Analysts expect BILI’s revenue to marginally decline year-over-year to $3.16 billion for the fiscal year ending December 2023. In addition, the company is expected to report a loss per share of $1.48 for the ongoing year.
Over the past three years, LX’s revenue and EBITDA rose at a CAGR of 2.3% and 12.2%, respectively. Its net income and EPS grew 31% and 32.9% during the same period, respectively. Moreover, the company’s total assets increased at a CAGR of 2.3% during the same time frame.
For the fiscal year ending December 2023, LX’s revenue is expected to increase 22.1% year-over-year to $1.76 billion. Similarly. the company's EPS for the current year is expected to be $1.06, up 34.8% from the previous year.
Valuation
In terms of trailing-12-month Price/Sales, LX is trading at 0.17x, 89.1% lower than BILI, which is trading at 1.56x. Moreover, LX’s trailing-12-month EV/Sales of 0.50x is 60.9% lower than BILI’s 1.28x. In addition, LX’s trailing-12-month Price to Book of 0.22x compares with BILI’s 2.15x.
Profitability
BILI’s trailing-12-month revenue is 1.8 times that of what LX generates. However, LX is more profitable, with a trailing-12-month gross profit margin of 38.55%, compared to BILI’s 22.54%.
Additionally, LX’s trailing-12-month EBITDA margin and net income margin of 14.13% and 10.76% compare to BILI’s EBITDA margin and net income margin of negative 7.78% and negative 22.49%, respectively.
POWR Ratings
BILI has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, LX has an overall rating of A, translating to a Strong Buy. 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. BILI has a D grade for Quality, reflecting its lower-than-industry profitability. Its trailing-12-month ROCE and ROTA of negative 31.38% and negative 15.42% compare to the respective industry averages of 3.54% and 1.27%.
In contrast, LX has a B grade for Quality, supported by its higher-than-industry profitability. The stock’s trailing-12-month ROCE and ROTA of 14.98% and 5.72% are 28.5% and 396.5% higher than the industry averages of 11.66% and 1.15%, respectively.
In addition, BILI has a D grade for Stability, justified by its 60-month beta of 1.16. In comparison, LX has a C grade for Stability, consistent with its 60-month beta of 0.87.
Of the 41 stocks in the China industry, BILI is ranked #36, while LX is ranked #4.
Beyond what we've stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view BILI’s ratings. Get all LX ratings here.
The Winner
Considering China’s economy is rapidly recovering, both BILI and LX stand to benefit from the nation’s growth. However, LX’s superior financial performance, higher profitability, discounted valuation and favorable analyst sentiment position it as a better investment choice over BILI this month.
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.
BILI shares were trading at $11.45 per share on Friday afternoon, up $0.12 (+1.06%). Year-to-date, BILI has declined -51.67%, versus a 21.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
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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