China’s economy has been slammed recently by a multitude of concerning developments. The real estate market is again going through a painful deleveraging, demographic issues are putting pressure on labor force participation and economic growth is being challenged by a wave of deflation.
Making it all more difficult is that most observers were expecting a strong economic rebound following the proper re-opening of the Chinese economy, which has not materialized in the slightest.
To say that China’s economy is struggling would be an understatement, but often in markets, it is the darkest before dawn. With all this bad news hitting at once it’s possible that most market participants are becoming the most bearish exactly when they should be looking for opportunities to buy.
Furthermore, Chinese authorities are now taking action to get the market action to improve. They have lowered a key lending rate, and cut taxes related to stock trading.
Although I of course don’t know where the low China’s market is, this is the sentiment you want to look for as a contrarian investor. Investors interested in bottom fishing Chinese stocks should check out these three stocks: Alibaba BABA, NetEase NTES, and New Oriental Educations & Technology Group EDU, which all boast top Zacks Ranks, and compelling price action.
Alibaba is a Chinese multinational conglomerate that operates in various sectors including e-commerce, technology, retail, and more. Founded by Jack Ma, Alibaba is best known for its e-commerce platforms, including Alibaba.com and Taobao, which facilitate online retail transactions.
The company also has a significant presence in cloud computing, digital entertainment, and financial services through subsidiaries like Alibaba Cloud, Youku, and Ant Group. With its diverse portfolio, Alibaba has become a prominent player in the global technology and e-commerce landscape.
Analysts have near unanimously upgraded earnings estimates for Alibaba over the last two months, giving the stock a Zacks Rank #1 (Strong Buy) rating.. Current quarter earnings have been revised higher by 13.1% and are projected to climb 19% YoY to $2.16 per share. Additionally, FY23 earnings have been increased by 17.3% and are forecast to grow 15.4% YoY to $9.16 per share.
Furthermore, sales for the Chinese tech giant are expected to grow 5% YoY to $132.3 billion this year and 9% YoY to $144.2 billion next year.
The most appealing aspect about Alibaba to me is its historically cheap valuation. The stock is trading near its 10-year low at 11.5x one year forward earnings, which is well below the broad market average of 21x, and its five-year median of 28.2x.
This along with sharply higher earnings estimates, and sentiment at a low makes this a particularly appealing setup.
New Oriental Education & Technology Group
New Oriental Education & Technology Group is a leading provider of private educational services in China. Founded in 1993, the company offers a wide range of educational programs and services, including language training, test preparation, and academic tutoring for students from kindergarten to adult learners.
EDU is well-known for its English language learning programs, which have gained immense popularity in China. With a strong presence across the country, the company has played a significant role in shaping the education landscape in China and has become a trusted name in the field of private education.
Demonstrated by its earnings revisions trending strongly higher, New Oriental Education and Technology company enjoys a Zacks Rank #1 (Strong Buy) rating. FY23 earnings estimates have been upgraded by 23.3% over the last two months and are forecast to grow 54% YoY to $2.33 per share.
New Oriental Education & Technology Group stock has shown tremendous momentum since breaking out of a large consolidation in late July. More recently, it broke out from a bull flag and is showing constructive behavior, holding above support.
EDU is trading at a one year forward earnings multiple of 27.5x, which is above the market average of 21x, and below its five-year median of 38.2x.
NetEase is a Chinese technology company known for its prominent presence in online gaming, e-commerce, and internet services. Founded in 1997, NetEase has developed popular online multiplayer games such as “Fantasy Westward Journey” and “World of Warcraft,” which it partnered with Blizzard to offer in China.
In addition to its gaming division, the company also operates in e-commerce through platforms like Yanxuan, offering a wide range of products to consumers. NetEase has extended its reach to music streaming with services like NetEase Cloud Music, making it a multifaceted player in China’s rapidly growing technology sector.
NetEase has seen its earnings estimates trending higher all year giving it a Zacks Rank #1 (Strong Buy). More recently FY23 earnings estimates have been revised higher by 12.2% and are expected to grow 48% YoY to $6.54 per share. Over the next 3-5 years EPS are forecast to increase 13.2% annually, an enviable pace.
NetEase stock has nearly doubled off its 2022 low and has been showing considerable strength all year. Although the setup is not particularly clean, I think the technical pattern indicates another leg higher in the near future. It looks like a pullback in an uptrend, and if it can hold above the $103 level, may make a bull run.
NetEase is trading at a one year forward earnings multiple of 19.3x, which is below the market average of 21x, and below its five-year median of 26.3x. Additionally, NTES offers a dividend yield of 1.8% and has raised the payment by an average of 26% annually over the last five years.
Admittedly, there are considerable exogenous risks surrounding investments in China, amping up the risk reward profile. In addition to the economic weakness we discussed, there are also geopolitical tensions between the US and China that continue to build. However, much of that is now priced in, and if things don’t get worse, they could get much better.
NetEase, Inc. (NTES): Free Stock Analysis Report
This article originally appeared on Zacks
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