Despite facing challenges like poor domestic consumption, weakness in the property sector, record high youth employment, etc., China's economy is showcasing signs of a recovery driven by increased government spending on infrastructure, plans to boost factory investment and allow higher foreign investment in different sectors.
Given this promising backdrop, investors could be wise to add fundamentally strong Chinese stocks Trip.com Group Limited (TCOM), HUTCHMED (China) Limited (HCM), and JD.com, Inc. (JD) to their portfolios for solid gains.
China's economy rebounded strongly, with a 5.3% GDP growth in the first quarter of this year, driven by solid consumption and industrial profits. The economy's recovery is on track as China's May Day holiday saw a surge in tourism and consumer spending. Data revealed 295 million domestic tourist trips were undertaken, up 7.6% year-on-year.
Domestic spending also surged 13.5% compared to 2019 figures. Experts are optimistic thanks to continued policy measures and a strategic focus on sustaining growth, aiming for the targeted 5% annual development goal amid complex global economic dynamics.
Consequently, investors are optimistic as the People's Bank of China pledges flexible policies to boost domestic demand and ensure price stability, hinting at further potential monetary easing measures. China's plans are ambitious as they look to be a strong driving force for the global economic recovery. Its import and export of goods is expected to exceed $32 trillion in the next five years.
Although challenges in the real estate sector and subdued private consumption will continue to affect China’s growth, its economy is forecasted to grow at 4.7% in Q2 2024, reflecting stronger investment and manufacturing activities, particularly in the production of high-tech goods.
Considering these encouraging trends, let’s discuss the fundamentals of the three China stock picks, starting with the third choice.
Stock #3: Trip.com Group Limited (TCOM)
Based in Singapore, TCOM and its subsidiaries provide travel services for accommodation reservations, transportation ticketing, packaged tours, in-destination services, corporate travel management, and other travel-related services in China and internationally.
In terms of the trailing-12-month levered FCF margin, TCOM’s 35.24% is 521.2% higher than the 5.67% industry average. Likewise, its 22.28% trailing-12-month net income margin is 382.1% higher than the 4.62% industry average. Furthermore, its 4.53% trailing-12-month Return on Total Assets is 8.4% higher than the 4.18% industry average.
For the fourth quarter that ended December 31, 2023, TCOM’s total revenue rose 105.5% year-over-year to RMB10.34 billion ($1.43 billion). The company’s gross profit grew 117.2% from the year-ago value to RMB8.32 billion ($1.15 billion).
Its non-GAAP net income attributable to TCOM and non-GAAP EPS came in at RMB2.68 billion ($370.42 million) and RMB4, up 437.1% and 426.3% from the prior year’s quarter, respectively. Furthermore, the company’s adjusted EBITDA increased 898.2% year-over-year to RMB2.86 billion ($395.34 million).
For the quarter ended March 31, 2024, TCOM’s EPS and revenue are expected to increase 34% and 25.6% year-over-year to $0.58 and $1.62 billion, respectively. It surpassed the revenue estimates in each of the trailing four quarters. Over the past year, TCOM’s stock has gained 60.8% to close the last trading session at $53.29.
TCOM’s favorable prospects are reflected in its POWR Ratings. It has an overall rating of B, 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 an A grade for Sentiment and a B for Quality. It is ranked #16 out of 39 in the B-rated China industry. Beyond what we have stated above, we have also rated TCOM for Growth, Value, Momentum, and Stability. Get all the ratings of TCOM here.
Stock #2: HUTCHMED (China) Limited (HCM)
Headquartered in Hong Kong, HCM and its subsidiaries discover, develop, and commercialize targeted therapeutics and immunotherapies for cancer and immunological diseases in Hong Kong and internationally.
On April 2, 2024, HCM and Innovent jointly announced the acceptance of their New Drug Application for the fruquintinib-sintilimab combination, with priority review status. This marks the first regulatory filing for this combination in treating advanced endometrial cancer, following Breakthrough Therapy designation in July 2023.
The companies are optimistic about the potential of this combination therapy to address an unmet medical need in patients with advanced endometrial cancer.
In terms of the trailing-12-month EBIT margin, HCM’s 2.19% is 313.7% higher than the 0.53% industry average. HCM’s trailing-12-month levered FCF margin of 4.74% is 797% higher than the industry average of 0.53%. Similarly, the stock’s 3.89% trailing-12-month Capex / Sales is 2.4% higher than the industry average of 3.80%.
HCM’s total revenue for the fiscal year that ended on December 31, 2023, increased 96.5% year-over-year to $838 million. The company's net income and EPS attributable to HCM were $100.78 million and $0.12, respectively, compared to a net loss and a loss per share of $360.84 million and $0.43 in the prior year's period.
Additionally, HCM's total assets stood at $1.28 billion as of December 31, 2023, compared to $1.03 billion as of December 31, 2022.
Analysts expect HCM’s revenue for fiscal 2025 to increase 22.7% year-over-year to $835.80 million. Over the past three months, the stock has gained 39.8% to close the last trading session at $19.47.
HCM’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #12 in the same industry. It has an A grade for Value and Sentiment. Click here to see HCM’s Growth, Momentum, Stability, and Quality ratings.
Stock #1: JD.com, Inc. (JD)
Headquartered in Beijing, JD provides supply chain-based technologies and services in the People's Republic of China. The company offers computers, communication, and consumer electronics products, as well as home appliances and general merchandise products.
JD’s 1.77x trailing-12-month asset turnover ratio is 78.5% higher than the 0.99x industry average.
During the fiscal fourth quarter, which ended on December 31, 2023, JD’s total net revenues increased 3.6% from the prior-year quarter to RMB306.08 billion ($42.35 billion). Its non-GAAP income from operations rose 7.5% year-over-year to RMB7.79 billion ($1.08 billion).
For the same quarter, the company’s non-GAAP net income attributable to the company’s ordinary shareholders amounted to RMB8.42 billion ($1.16 billion) and RMB5.30 per ADS, up 9.9% and 10.2% from the year-ago value, respectively.
Street expects JD’s revenue for the quarter ended March 31, 2024, to increase 1.8% year-over-year to $35.62 billion. Its EPS for the quarter ending June 30, 2024, is expected to grow marginally year-over-year to $0.74. It surpassed the Street EPS and revenue estimates in each of the trailing four quarters. Over the past three months, the stock has gained 44.9% to close the last trading session at $31.95.
JD’s POWR Ratings reflect a positive outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth and Value. It is ranked #11 in the China industry. To see JD’s Momentum, Stability, Sentiment, and Quality ratings, click here.
What To Do Next?
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JD shares were trading at $32.20 per share on Thursday morning, up $0.25 (+0.78%). Year-to-date, JD has gained 14.57%, versus a 9.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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