Chinese stocks faced a challenging period in recent years, grappling with regulatory crackdowns and geopolitical tensions. However, the tide seems to be turning as investment banks express bullish sentiment toward Chinese equities. The iShares MSCI China ETF (MCHI) has outpaced the broader market, gaining 13.2% year-to-date, indicating a potential shift in momentum.
Given the optimism, it could be wise to watch and wait for a suitable entry point in fundamentally sound China stocks Waterdrop Inc. (WDH), HUTCHMED (China) Limited (HCM), and Trip.com Group Limited (TCOM).
The downturn in Chinese stocks during 2022 and 2023 can largely be attributed to regulatory crackdowns across various sectors. These crackdowns, coupled with escalating tensions between the United States and China, created an atmosphere of uncertainty and apprehension among investors. Consequently, investing sentiment in Chinese equities reached multi-year lows, leading to subdued market performance.
However, the landscape has shifted notably in 2024, the world’s second-largest economy, reporting a stronger-than-expected economic growth of 5.3% in the January-March quarter. This year-over-year increase was faster than the Reuters poll expectations of 4.6% growth and a revised fourth-quarter 1.2% expansion. Further, Beijing has set a 2024 growth target of around 5%.
Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, believes that external demand played a significant role in driving this growth, with export volume increasing by 14% year-on-year.
Moreover, China’s retail sales of consumer goods, a vital measure of the nation’s consumption strength, surged 4.7% year-over-year in the first quarter. Urban retail sales grew by 4.6% year-over-year, while rural areas saw an even stronger growth rate of 5.2%. The digital economy also thrived, with online retail sales climbing by 12.4% year-on-year.
Amid this newfound optimism, analysts from Goldman Sachs have forecasted a potential 40% increase in Chinese A-share valuations, underlining the growing confidence in the market. Similarly, UBS has upgraded its outlook on the MSCI China Index and Hong Kong stocks to overweight, further bolstering investor sentiment.
As the market shows signs of strength and resilience, now could be an opportune time to consider wagering on these three Chinese stocks: WDH, TCOM, and HCM. They are poised to capitalize on the evolving market dynamics.
Let’s look at the fundamentals of these stocks in detail, beginning with number 3.
Stock #3: Waterdrop Inc. (WDH)
Headquartered in Beijing, WDH provides online insurance brokerage services to link users with related insurance products underwritten by insurance companies in the People’s Republic of China. It also offers short-term and long-term health and life insurance products and services.
On March 27, the company announced a special cash dividend of approximately $15 million. This dividend, amounting to $0.04 per ADS or $0.004 per ordinary share for 2023, was paid to its shareholders on April 30, 2024 (ADS holders received the payment on May 3).
In terms of forward Price/Sales, WDH is currently trading at 1.04x, 59.9% lower than the industry average of 2.59x. Its forward Price/Cash Flow multiple of 7.89 is 40.2% lower than the industry average of 13.19x.
WDH’s net operating revenue amounted to RMB659.36 million ($91.13 million) in the fourth quarter, which ended on December 31, 2023. Its operating profit came in at RMB26.64 million ($3.68 million) compared to an operating loss of RMB2.07 million ($286.07 thousand) in the third quarter (ended September 30, 2023). The company’s adjusted net profit amounted to RMB74.66 million ($10.32 million), while its net profit per share stood at RMB0.02.
Analysts expect WDH’s revenue for the fiscal year 2024 to increase 15.1% year-over-year to $419.60 million. Its EPS for the current year is expected to grow significantly year-over-year to $0.08. Over the past three months, the stock has gained 19% to close the last trading session at $1.19.
WDH’s fundamentals are reflected in its POWR Ratings. It also has a B grade for Momentum and Sentiment. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #18 out of 39 stocks in the China industry. Click here to see the additional ratings of WDH for Growth, Value, Stability, and Quality.
Stock #2: HUTCHMED (China) Limited (HCM)
Headquartered in Hong Kong, HCM is engaged in the research, development, and commercialization of targeted therapeutics and immunotherapies for cancer and immunological diseases globally.
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 innovative therapy aimed at treating advanced endometrial cancer, following Breakthrough Therapy designation in July 2023. Both companies are optimistic about the therapy’s potential to address the unmet medical needs of patients with advanced endometrial cancer.
In terms of trailing-12-month EV/Sales, HCM is trading at 3.56x, 5.3% lower than the industry average of 3.76x. Similarly, the stock’s trailing-12-month Price/Cash Flow of 17.17x is 5.1% lower than the 18.09x industry average.
For the fiscal year that ended on December 31, 2023, HCM’s total revenue 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 cash and cash equivalents and short-term investments stood at $886.34 million as of December 31, 2023, compared to $630.99 million as of December 31, 2022.
Street expects HCM’s revenue for fiscal 2025 to increase 22.8% year-over-year to $842.38 million and its EPS to be $0.34. Over the past nine months, the stock has gained 53.1% to close the last trading session at $21.78.
HCM’s POWR Ratings reflect its prospects. It is ranked #16 in the same industry. It has an A grade for Sentiment and a B for Value. Click here to see HCM’s Growth, Momentum, Stability, and Quality ratings.
Stock #1: Trip.com Group Limited (TCOM)
Based in Singapore, TCOM and its subsidiaries provide travel services for accommodation reservations, transportation ticketing, packaged tours, in-destination, corporate travel management, and other travel-related services in China and worldwide. The company operates under the Ctrip, Qunar, Trip.com, and Skyscanner brands.
Earlier this year, TCOM witnessed a substantial surge in international and inbound travel, largely attributed to Lunar New Year festivities. International travel surged over tenfold, spurred by relaxed visa policies, particularly to Asian destinations. Moreover, inbound travel to China saw a considerable uptick, marking one of the busiest travel seasons for the company.
In terms of forward non-GAAP PEG, TCOM is trading at 0.45x, 72.3% lower than the industry average of 1.61x. Likewise, its forward Price/Book multiple of 1.89 is 23.8% lower than the industry average of 2.48.
For the fourth quarter that ended December 31, 2023, TCOM’s net revenue increased 105.4% year-over-year to RMB10.32 billion ($1.43 billion). Its gross profit grew 117.2% from the year-ago value to RMB8.32 billion ($1.15 billion).
During the same period, its non-GAAP attributable net income and non-GAAP EPS improved by 437.1% and 426.3% from the prior year’s quarter to RMB2.68 billion ($370.37 million) and RMB4, respectively. The company’s adjusted EBITDA also stood at RMB2.86 billion ($395.25 million), reflecting a substantial year-over-year improvement of 898.2%.
Analysts expect TCOM’s revenue and EPS for the to-be-reported first quarter (ended March 31, 2024) to increase 25.4% and 34% year-over-year to $1.62 billion and $0.58, respectively. Moreover, the company has topped consensus revenue estimates in all four trailing quarters, which is impressive.
Shares of TCOM have surged 55.9% over the past six months and 66.1% over the past year to close the last trading session at $54.90.
TCOM’s prospects are reflected in its POWR Ratings. It has an A grade for Sentiment. Within the same industry, it is ranked #15 among 39 stocks. To see the other ratings of TCOM for Growth, Value, Momentum, Stability, and Quality, click here.
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TCOM shares . Year-to-date, TCOM has gained 52.46%, versus a 9.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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