What Do These 3 China Stocks Have in Common? Quality and Smart Money Interest The Chinese economy demonstrated immense resilience despite facing many challenges. This solidity is strengthened further by an array of initiatives deployed by the nation, which have the potential to fortify...
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The Chinese economy demonstrated immense resilience despite facing many challenges. This solidity is strengthened further by an array of initiatives deployed by the nation, which have the potential to fortify its financial terrain. Therefore, quality Chinese stocks Alibaba Group Holding (BABA), FinVolution Group (FINV), and LexinFintech Holdings (LX), owned significantly by institutional investors, might be solid portfolio additions now. Read on….
China's robust handling of past economic pressures has ensured stability. Despite fears spurred by sluggish growth noted in the second quarter of 2023, positive changes are anticipated following the upcoming Politburo meeting in July, where stronger stimulus measures are expected to be initiated.
Amid such fluctuating economic conditions, investing in stocks favored by institutional investors could prove prudent. Hence, substantial holdings in China stocks Alibaba Group Holding Limited (BABA), FinVolution Group (FINV), and LexinFintech Holdings Ltd. (LX) by institutional investors signify their potential value, making them solid buys now.
Before delving deeper into the fundamentals of these stocks, let us first explore the current happenings at the forefront of China's economic climate.
China, the world's second-largest economy, experienced a rapid economic expansion in the first quarter of 2023 following a lift from stringent Covid-19 restrictions. This post-lockdown resurgence, however, lost steam as declining exports due to reduced foreign demand and prolonged instability in the real estate market undermined confidence.
China's economy grew 0.8% in the second quarter, which starkly contrasts with the impressive 2.2% observed in the first quarter of 2023. However, according to the National Bureau of Statistics (NBS), China's 5.5% year-over-year GDP growth in the first half of 2023 is the fastest among major economies, with relatively high valuation and quality, despite adversities.
China's escalated geopolitical tensions with the United States are amplifying the economic uncertainty. Private fixed-assets investment declined by 0.2% during the first half of 2023, a considerable drop from the 8.1% growth marked by state-led investment. Real estate investment, which served as a backbone for China's economy for nearly two decades, has also witnessed a downturn.
Nevertheless, China has been amplifying its initiatives to reinforce the economy. The government recently introduced a series of promises addressing specific sectors to foster assurance among domestic and foreign investors by offering a more favorable investment climate.
The National Development and Reform Commission (NDRC) vowed to boost consumption to strengthen economic progression, ensure stability in youth employment, and curate a more investor-friendly ambiance for private undertakings.
Some institutional investors remain wary of Chinese stocks. However, notables such as Michael Burry of Singapore's sovereign wealth fund Temasek have shown their confidence in Chinese shares. Coupled with JD.com, he reinforced his positions in BABA by adding 100,000 shares in the first quarter of 2023.
Also, the founder of Mobius Capital Partners, Mark Mobius, said, "As the property sector begins to get revived and problems of debt is solved, then you'll see the Chinese investors come back. The price index is beginning to recover."
Furthermore, investors' interest in China stocks is evident from the Invesco Golden Dragon China ETF's (PGJ) 10% returns over the past three months.
Therefore, following smart money and investing in strong China stocks BABA, FINV, and LX could be wise.
Alibaba Group Holding Limited (BABA)
Headquartered in Hangzhou, China, BABA is a leading technology company specializing in e-commerce, retail, Internet, and technology. The company operates through seven segments: China Commerce; International Commerce; Local Customer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others. Roughly 15.3% of BABA shares are held by institutions.
During the quarter that ended March 31, 2023, the company repurchased 21.5 million ADSs (the equivalent of 172.4 million ordinary shares) for approximately $1.9 billion under its share repurchase program. As of March 31, 2023, BABA had 20.5 billion ordinary shares (the equivalent of roughly 2.6 billion ADSs) outstanding and approximately $19.4 billion remaining under the current authorization, effective through March 2025.
BABA's trailing-12-month EBITDA margin of 17.62% is 61.7% higher than the industry average of 10.90%. Likewise, its trailing-12-month net income margin and levered FCF margin of 8.38% and 13.06% are 100.1% and 253.1% higher than the industry averages of 4.19% and 3.70%, respectively.
BABA's revenue has grown at 19.5% and 28.3% CAGRs over the past three and five years, respectively. Moreover, its tangible book value has grown at 17.3% and 32.3% CAGRs over the past three and five years, respectively.
In the fiscal fourth quarter that ended March 31, 2023, BABA's revenue increased 2% year-over-year to $30.32 billion. Its revenue from the International Commerce segment rose 29.3% from the year-ago value to $2.70 billion. Its adjusted EBITDA stood at $4.68 billion, an increase of 37.4% year-over-year.
Furthermore, BABA's non-GAAP net income and non-GAAP earnings per share grew 38.3% and 35.4% year-over-year to $3.99 billion and $0.20, respectively. The company's cash inflows from operating activities stood at $4.57 billion for the same quarter.
Analysts expect BABA's revenue and EPS for the fiscal second quarter (ending September 2023) to increase 7.1% and 10.7% year-over-year to $31.01 billion and $2, respectively. The company has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.
Over the past month, the stock has gained 13.5% to close the last trading session at $96.35. The stock has gained 4.5% intraday.
BABA's POWR Ratings reflect a robust outlook. It has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has a B grade for Sentiment and Quality. It is ranked #19 out of 45 stocks in the China industry.
Click here to see BABA's additional ratings (Growth, Value, Momentum, and Stability).
FinVolution Group (FINV)
Headquartered in Shanghai, China, FINV operates a fintech platform, connecting underserved individual borrowers with financial institutions in China and internationally. It is engaged in operating an online consumer finance platform. FINV's products and services include loan services and investment services. Institutions hold roughly 49.3% shares of the company.
Last month, FINV's Indonesian financial application, AdaKami, signed a strategic cooperation agreement with Bank OCBC NISP, an Indonesian publicly listed banking and financial services company. The strategic cooperation would drive innovation in the digital financial ecosystem and facilitate credit access.
Also, the company would be well-positioned to proactively optimize its product mix and diversify business models, offering attractive interest rates and enhancing its technologies for credit risk assessment and customer acquisition. Moving forward, it would also strengthen its international foothold and capture the enormous opportunities in the fintech space in Southeast Asia.
FINV's trailing-12-month gross profit margin of 78.85% is 33.9% higher than the 58.91% industry average. Its trailing-12-month ROCE, ROTC, and ROTA of 20.82%, 33.48%, and 11.37% are 84.5%, 535.9%, and 920.1% higher than the industry averages of 11.28%, 5.26%, and 1.12%, respectively.
FINV's revenues have grown at 20.4% and 23% CAGRs over the past three and five years, respectively. Moreover, its tangible book value has grown at 20.7% and 24.9% CAGRs over the past three and five years, respectively.
For the fiscal first quarter that ended March 31, 2023, FINV's net revenue increased 24.7% year-over-year to $444.21 million. Its non-GAAP adjusted operating income stood at $111.05 million, up 26.7% from the prior-year quarter.
Also, its total comprehensive net income and non-GAAP net profit per ADS attributable to FINV ordinary shareholders stood at $97.08 million and $0.36, up 25.3% and 32.4% from the year-ago quarter, respectively. Its cash, cash equivalent, and restricted cash for the same quarter stood at $1.17 billion, up 13.1% year-over-year.
The company expects China's Mainland transaction volume for the fiscal second quarter of 2023 to be around RMB45 billion, representing approximately 10.8% year-over-year growth, while its international markets transaction volume for the same quarter is expected to increase about 86.8% year-over-year, to around RMB1.7 billion.
Analysts expect FINV's revenue and EPS for the fiscal year ending December 2023 to increase 13.4% and 6.1% year-over-year to $1.84 billion and $1.25, respectively.
Over the past three months, the stock has gained 45.7% to close the last trading session at $5.39. The stock has gained 20.3% over the past month.
FINV's POWR Ratings reflect its solid prospects. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has a B grade for Value, Stability, Sentiment, and Quality. It is ranked first within the China industry.
Click here to see the ratings of FINV for Growth and Momentum.
LexinFintech Holdings Ltd. (LX)
Headquartered in Shenzhen, the People's Republic of China, LX provides online consumer finance services. The company operates Fenqile.com, Le Hua Card, and Maiya application. Institutions hold about 21.6% shares of LX.
During the fiscal year of 2022, LX's board of directors authorized share repurchase programs on March 16, 2022, and on November 17, 2022, under which the company could purchase up to an aggregate of $70 million of its shares/ADSs over the next twelve months. Till now, LX has repurchased approximately 22 million ADSs for roughly $48 million, in aggregate, under these repurchase programs.
LX's trailing-12-month asset turnover ratio of 0.49x is 137.9% higher than the 0.20x industry average. Its trailing-12-month ROCE and ROTA of 12.48% and 4.35% are 10.6% and 289.8% higher than the industry averages of 11.28% and 1.12%, respectively.
Over the past five years, LX's revenue and EBITDA have grown at 13.3% and 6% CAGRs, respectively. Moreover, its tangible book value has grown at 38.7% and 33.2% CAGRs over the past three and five years, respectively.
LX's total operating revenue for the fiscal first quarter that ended March 31, 2023, increased 74.2% year-over-year to $434.34 million. Its gross profit was $131.52 million, up 96% from the year-ago quarter.
Its adjusted net income attributable to ordinary shareholders of the company increased 190.2% year-over-year to $54.61 million. Adjusted net income per ordinary share attributable to ordinary shareholders of the company stood at RMB1.00, representing an increase of 222.6% year-over-year.
Analysts expect LX's revenue and EPS for the fiscal year ending December 2023 to increase 20.3% and 51.5% year-over-year to $1.73 billion and $1.19, respectively.
Over the past three months, the stock has gained 17.3% to close the last trading session at $2.64. The stock gained 39% year-to-date.
LX's strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to Strong Buy in our proprietary rating system.
The stock has an A grade for Value and B for Growth, Sentiment, and Quality. It is ranked #2 in the same industry.
Beyond what we have mentioned above, to see the other ratings of LX for Momentum and Stability, click here.
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BABA shares rose $1.55 (+1.61%) in premarket trading Tuesday. Year-to-date, BABA has gained 11.15%, versus a 19.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
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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