Over the past year, China grappled with several obstacles, including stringent pandemic restrictions, regulatory clampdowns on the private sector, geopolitics, and the specter of a slowing economy. Nevertheless, strategic measures taken by the Chinese authorities may stimulate economic growth and bolster the stability of the nation's stock market.
Given the optimism, investors could add fundamentally strong China stocks China Automotive Systems, Inc. (CAAS), LexinFintech Holdings Ltd. (LX), and NetEase, Inc. (NTES) to their portfolio to secure future weekly gains.
Following a challenging period, China, the world's second-largest economy, exceeded its economic growth target of 5% in 2023, achieving 5.2%, driven mainly by rapid growth in EVs and robust domestic tourism. However, this marked the country's most sluggish annual growth rate since 1990.
The environment remains uncertain for consumers and businesses due to regulatory crackdowns across several sectors, including digital technology, gaming, out-of-school education, and real estate. U.S.-China tensions over tech competition have further complicated matters.
The IMF expects China’s GDP to slow down to 4% in 2025 due to the ongoing property sector strains, which could reduce the demand and contribute to local government budget tensions.
However, anticipation is building for an increase in economic and financial market support from China, particularly given recent monetary easing initiatives by its central bank, The People’s Bank of China. A decision to cut the reserve requirement ratio (RRR) by 50 basis points could inject as much as 1 trillion yuan ($139.05 billion) in long-term capital into the economy, prompting hopes for a financial resurgence.
Chinese authorities also plan to infuse approximately 2 trillion yuan ($278.10 billion) sourced from state-owned enterprises to reinforce market stability.
Acknowledging these proactive measures, the IMF recently elevated China's GDP growth forecast for 2024 to 4.6%, up from 4.2%. Additionally, economists predict that China's central bank could cut rates in the first half of 2024 to stimulate domestic demand.
In light of these encouraging trends, let's look at the fundamentals of the three B-rated China stocks, starting with the third in line.
Stock #3: China Automotive Systems, Inc. (CAAS)
Headquartered in Jingzhou, the People's Republic of China, CAAS manufactures and sells automotive systems and components in the People's Republic of China and internationally.
CAAS’ trailing-12-month cash per share of $3.59 is 47% higher than the industry average of $2.44, while its trailing-12-month net income margin of 5.70% is 19.7% higher than the industry average of 4.76%.
Over the past three and five years, its EBITDA grew at CAGRs of 46.9% and 16.2%, respectively, while its tangible book value grew at 4.2% and 2.1% CAGRs over the same periods.
For the fiscal third quarter that ended September 30, 2023, CAAS’ net product sales increased marginally year-over-year to $137.54 million, while gross profit stood at $24.76 million, up 18.4% from the year-ago quarter. Moreover, its income from operations increased 107.8% from the prior-year quarter to $10.15 million.
For the same quarter, net income attributable to parent company’s common shareholders and net income attributable to parent company’s common shareholders per share stood at $9.49 million and $0.31, up 27% and 29.2% from the year-ago quarter, respectively.
The stock has gained 9.3% year-to-date to close the last trading session at $3.53. Over the past month, it has gained 11.7%.
CAAS’ robust prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system. 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 Value and a B for Growth, Stability, and Sentiment. It is ranked #4 within the B-rated 41-stock China industry.
Click here for the additional POWR Ratings for CAAS (Momentum and Quality).
Stock #2: LexinFintech Holdings Ltd. (LX)
Headquartered in Shenzhen, the People's Republic of China, LX provides online direct sales services and online consumer finance services in the People's Republic of China.
It pays an annual dividend of $0.23 per share, which translates to a dividend yield of 12.54% on the current share price. Its four-year average yield is 0.65%.
LX’s trailing-12-month asset turnover ratio of 0.54x is 155.4% higher than the industry average of 0.21x. Its trailing-12-month ROCE and ROTA of 14.98% and 5.72% are 40.1% and 428% higher than the industry averages of 10.69% and 1.08%, respectively.
Over the past three and five years, its tangible book value grew at CAGRs of 31.4% and 25.8%, respectively, while its common equity grew at 25.7% and 28.3% CAGRs over the same periods.
For the fiscal third quarter that ended September 30, 2023, LX’s total operating revenue and gross profit increased 30.4% and 51.2% year-over-year to $480.94 million and $185.90 million, respectively. Moreover, its non-GAAP EBIT stood at $72.27 million, up 30% from the prior-year quarter.
For the same quarter, adjusted net income attributable to ordinary shareholders of the company and adjusted net income per ADS attributable to ordinary shareholders of the company increased 26.2% and 35.8% from the year-ago quarter to $57.19 million and $0.32, respectively.
Street expects LX’s revenue and EPS for the fiscal year ending December 2024 to increase 10.1% and 22.5% year-over-year to $1.94 billion and $1.30, respectively.
The stock has gained marginally intraday to close the last trading session at $1.85.
LX’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
LX has an A grade for Value and a B for Momentum, Sentiment, and Quality. Within the same industry, it is ranked #3.
Beyond what we’ve stated above, we have also rated the stock for Growth and Stability. Get all ratings of LX here.
Stock #1: NetEase, Inc. (NTES)
Headquartered in Hangzhou, the People's Republic of China, NTES engages in online games, music streaming, online intelligent learning services, and internet content services businesses in China and internationally. The company operates through Games and Related Value-Added Services; Youdao; Cloud Music; and Innovative Businesses and Others segments.
On December 15, 2023, NTES paid the holders of ADSs a dividend of $0.50 per ADS for the third quarter of 2023.
On December 12, 2023, it also paid to the holders of ordinary shares a dividend of $0.10 per share for the third quarter of 2023. It pays an annual dividend of $1.76 per share, which translates to a dividend yield of 1.63% on the current share price. Its four-year average yield is 1.57%. NTES’ dividend payments have grown at CAGRs of 23.7% and 39.4% over the past three and five years, respectively.
As of September 30, 2023, approximately 6.60 million ADS had been repurchased under the new share repurchase program for a total cost of $587.90 million.
NTES’ trailing-12-month cash from operations of $4.46 billion is significantly higher than the industry average of $306.11 million. Its trailing-12-month EBIT and net income margins of 24.86% and 26.34% are 197% and 627.8% higher than the industry averages of 8.37% and 3.62%, respectively.
Over the past three and five years, its EBITDA grew at CAGRs of 17.1% and 25.4%, respectively, while its net income grew at 23.7% and 36.1% CAGRs over the same periods.
For the fiscal third quarter that ended September 30, 2023, NTES’ net revenues and gross profit increased 11.6% and 23.4% year-over-year to $3.74 billion and $2.33 billion, respectively. Moreover, its operating profit stood at $1.04 billion, up 59.4% from the prior year quarter.
For the same quarter, non-GAAP net income from continuing operations attributable to the company’s shareholders and non-GAAP net income from continuing operations per ADS increased 15.7% and 17.3% from the year-ago quarter to $1.18 billion and $1.82, respectively.
Street expects NTES’ revenue and EPS for the fiscal first quarter ending March 2024 to increase 8.6% and 6.4% year-over-year to $3.84 billion and $1.75, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 22.7% over the past year to close the last trading session at $107.76. Over the past month, it has gained 20.3%.
NTES’ POWR Ratings reflect its positive prospects. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.
NTES has a B grade for Growth, Value, Stability, Sentiment, and Quality. Within the same industry, it is ranked first.
To see additional POWR Ratings for Momentum for NTES, click here.
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NTES shares were unchanged in premarket trading Tuesday. Year-to-date, NTES has gained 15.67%, versus a 5.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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