3 China Stocks Poised for Market Domination Despite its property sector still showing weakness, China's retail sales and factory output surpass estimates during January-February, making a solid start for the year and providing tentative relief to policymakers....
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Despite its property sector still showing weakness, China's retail sales and factory output surpass estimates during January-February, making a solid start for the year and providing tentative relief to policymakers. Amid this backdrop, it could be wise to invest in top Chinese stocks Alibaba (BABA), Trip.com Group (TCOM), and Vipshop (VIPS) with potential for market domination. Read on….
The Chinese government set an ambitious goal for economic growth of "around 5%" in 2024. That is the same target set for last year when official data showed that the nation's total gross domestic product (GDP) rose by 5.2%. While continued weakness in the property sector remains a big concern, China's upbeat industrial output and retail sales mark a solid start for 2024.
Hence, fundamentally sound China stocks Alibaba Group Holding Limited (BABA), Trip.com Group Limited (TCOM), and Vipshop Holdings Limited (VIPS), which are poised for market domination, could be ideal investments now.
China's retail sales and factory output surpassed expectations in the January-February period, making a solid start for 2024 and providing some relief to policymakers that the stimulus rolled out in October seemed to yield results.
According to the data released by the National Bureau of Statistics (NBS), industrial output grew 7% for the first two months of this year, better than the analysts' expectations for a 5% rise in a Reuters poll. Retail sales, a consumption gauge, rose 5.5%, beating the 5.2% growth forecast. Fixed asset investment increased by 4.2%, more than the 3.2% expected by analysts.
Also, private investment in China rose 0.4% in the first two months, reversing the 0.4% decrease in the entire year of 2023.
However, a protracted crisis in the property sector remains a primary concern for policymakers, consumers, and investors. Property sales by floor area dropped by 20.5% in January-February from a year ago, versus the 23% fall in December 2023.
As per Goldman Sachs economists, China's sequential growth momentum remained robust during the first quarter despite notable divergence across sectors.
"However, to secure the ambitious 'around 5%' growth target this year, more policy easing is still necessary, especially on the demand-side (e.g., fiscal, housing and consumption)," they added.
Chinese Premier Li Qiang acknowledged that reaching the 2024 GDP target "will not be easy" and added that a "proactive" fiscal stance and "prudent" monetary policy are needed. The target required "the need to boost employment and incomes and prevent and defuse risks," Li stated.
China plans to reduce its budget deficit to 3% of economic output from the revised 3.8% last year. It intends to issue special ultra-long-term treasury bonds worth 1 trillion yuan ($139 billion), which are not included in the budget. The country has also set a consumer inflation target of 3% and aims to generate about 12 million urban jobs this year, maintaining the jobless rate at nearly 5.5%.
Given these favorable economic trends, let's look at the fundamentals of the three top China stock picks, beginning with the third choice.
Stock #3: Alibaba Group Holding Limited (BABA)
BABA, headquartered in Hangzhou, China, provides merchants, retailers, and other businesses with technology infrastructure and marketing reach for enhanced user and customer engagement. It operates in China Commerce; International Commerce; Local Consumer Services; Cainiao; Cloud; Digital Media and Entertainment; Innovation Initiatives; and Others segments.
On January 9, 2024, Alibaba.com, part of Alibaba International Digital Commerce Group (AIDC), announced the launch of its latest AI-powered Smart Assistant features at CES in Las Vegas, NV. The Smart Assistant is an AI-powered global sourcing tool that caters to both newcomers and seasoned entrepreneurs in the dynamic world of world commerce.
BABA's trailing-12-month EBITDA margin of 19.59% is 80.6% higher than the industry average of 10.85%. Likewise, the stock's trailing-12-month net income margin of 10.81% is 121.6% higher than the 4.88% industry average.
In terms of forward non-GAAP P/E, BABA is trading at 8.52x, 46.6% lower than the industry average of 15.93x. Its forward EV/EBITDA of 5.38x is 44.2% lower than the 9.65x industry average. Also, the stock's forward Price/Book multiple of 1.28 is 51.3% lower than the industry average of 2.62.
During the fiscal 2024 third quarter that ended December 31, 2023, BABA's revenue increased 5.1% year-over-year to $36.67 billion. Its adjusted EBITA rose 2% from the year-ago value to $7.44 billion. The company reported non-GAAP net income and non-GAAP earnings per share of $6.75 billion and $2.37, respectively.
As of December 31, 2023, the company's cash and cash equivalents came in at $35.89 billion, and its current assets were $113.70 billion.
Analysts expect BABA's revenue to increase 5.8% year-over-year to $130.67 billion for the fiscal year ending March 2024. The company's EPS for the ongoing year is estimated to grow 12.3% year-over-year to $8.71. Additionally, the company topped the consensus EPS estimates in three of the trailing four quarters.
The stock has gained marginally over the past five days to close the last trading session at $73.83.
BABA's bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
BABA has a B grade for Momentum and Quality. It is ranked #12 out of 40 stocks within the B-rated China industry.
Beyond what is stated above, we've also rated BABA for Growth, Value, Stability, and Sentiment. Get all BABA ratings here.
Stock #2: Trip.com Group Limited (TCOM)
Based in Shanghai, TCOM functions as a travel service provider for accommodation reservation, packaged tours and in-destination, transportation ticketing, corporate travel management, and other travel-related services internationally. The company operates under the Ctrip, Qunar, Trip.com, and Skyscanner brands.
On February 5, 2024, TCOM celebrated the Lunar New Year travel boom with a 10-fold surge in bookings due to growth in international and inbound travel. International travel has jumped ten times, driven by relaxed visa policies, especially to Asian destinations. Inbound travel to China also rose significantly, with a high number of global tourists joining in the celebrations across China.
In line with the regular capital return policy adopted in November 2023, in February 2024, TCOM's board of directors approved and authorized the company to periodically implement strategic capital return initiatives for an aggregate value of up to $300 million (the 2024 Capital Return Program).
TCOM's trailing-12-month gross profit margin of 81.75% is 127.8% higher than the industry average of 35.89%. Similarly, the stock's EBIT margin and net income margin of 25.44% and 22.28% are considerably higher than the industry averages of 7.53% and 4.88%, respectively.
For the fourth quarter that ended December 31, 2023, TCOM posted net revenue of $1.45 billion, an increase of 105% year-over-year, primarily driven by a substantial travel market recovery. The company's gross profit grew 117.2% from the year-ago value to $1.17 billion. Its income from operations came in at $309 million, up marginally from the prior year's quarter.
In addition, the company's cash, cash equivalents and restricted cash stood at $6.20 billion as of December 31, 2023, and its total current assets were $12.50 billion.
Street expects TCOM's revenue and EPS for the first quarter (ending March 2024) to increase 25.9% and 34.4% year-over-year to $1.62 billion and $0.58, respectively. Moreover, the company has surpassed consensus revenue estimates in each of the trailing four quarters, which is remarkable.
TCOM's stock has surged 6.7% over the past month and 26.1% over the past six months to close the last trading session at $44.68.
TCOM's sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
The stock has an A grade for Sentiment and a B for Quality. TCOM is ranked #10 among 40 stocks in the B-rated China industry.
In addition to the POWR Ratings above, one can access TCOM's additional POWR ratings for Value, Growth, Momentum, and Stability here.
Stock #1: Vipshop Holdings Limited (VIPS)
Headquartered in Guangzhou, VIPS operates online platforms in China. Its segments include Vip.com; Shan Shan Outlets; and Others. The company provides womenswear, menswear, sportswear, shoes and bags, accessories, skincare and cosmetics, home goods, and supermarket products. Also, it offers internet finance services like consumer and supplier financing.
VIPS' trailing-12-month net income margin of 7.19% is 47.4% higher than the industry average of 4.88%. The stock's trailing-12-month ROCE, ROTC, and ROTA of 23.29%, 14.47%, and 11.22% are significantly higher than the industry averages of 11.51%, 6%, and 4.26%, respectively.
In the fourth quarter, which ended on December 31, 2023, VIPS' net revenues increased 9.2% year-over-year to $4.88 billion, and its gross profit grew 19.3% from the year-ago value to $1.16 billion. The company's non-GAAP income from operations came in at $556.76 million, up 42.5% year-over-year.
Further, non-GAAP net income attributable to VIPS' shareholders rose 43.3% from the prior year's period to $450.50 million, and its non-GAAP net income per share was $0.82, an increase of 58.6% year-over-year. As of December 31, 2023, the company had cash and cash equivalents and restricted cash of $3.70 billion, and short-term investments of $279.30 million.
For the first quarter of 2024, VIPS expects its total net revenues to be between RMB27.50 billion ($3.82 billion) and RMB28.90 billion ($4.01 billion), representing a year-over-year increase of approximately 0% to 5%.
Analysts expect VIPS' revenue and EPS for the fiscal year ending December 2024 to increase 5.4% and 7.1% year-over-year to $16.52 billion and $2.51, respectively. In addition, the company beat consensus EPS estimates in all four trailing quarters, which is impressive.
Shares of VIPS have gained 6% over the past month and 21.9% over the past six months to close the last trading session at $17.68.
VIPS' POWR Ratings reflect its robust outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
VIPS has an A grade for Value. The stock also has a B grade for Momentum, Sentiment, and Quality. Within the B-rated China industry, it is ranked first among 40 stocks.
Click here to access VIPS' additional POWR Ratings for Growth and Stability.
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.
BABA shares fell $1.11 (-1.50%) in premarket trading Friday. Year-to-date, BABA has declined -4.75%, versus a 10.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet's keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet's looks to help retail investors understand the underlying factors before making investment decisions.
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