Despite facing challenges such as diminishing trade and foreign investments, a fluctuating housing market, and deflationary pressures, China continues to stand as one of the globe's largest and rapidly expanding economies. Additionally, China’s third-quarter economic data surpassing estimates suggests that recent policy measures have strengthened the ongoing recovery.
Given the optimism, three fundamentally solid Chinese stocks, Vipshop Holdings Limited (VIPS), Sunlands Technology Group (STG), and X Financial (XYF), could be wise additions to your portfolio.
China's economic growth in the third quarter surpassed expectations, raising optimism that the world's second-largest economy may achieve or even surpass Beijing's target of approximately 5% for this year.
As per the National Bureau of Statistics, China posted 4.9% growth in the July to September quarter from a year earlier, which surpasses the 4.6% GDP growth anticipated by economists. Additionally, the unemployment rate improved, decreasing to 5% in September from the previous month's 5.2%.
Furthermore, despite the property sector still remaining a weak point for China, its retail sales for October recorded a growth of 7.6% compared to the previous year, exceeding the 7% growth predicted by a Reuters poll. Meanwhile, industrial production for the same period increased by 4.6% year-on-year, surpassing the anticipated pace of 4.4%, according to the Reuters poll.
Moreover, advisers are proposing economic growth targets ranging from 4.5% to 5.5% for the upcoming year. This recommendation is made with the aim of fostering job creation and ensuring that China stays on course with its long-term development objectives.
On top of it, the International Monetary Fund (IMF) has revised its GDP growth projections for China, anticipating the country's economy to expand by 5.4% this year. This marks an increase from the earlier forecast of 5%. While, its GDP for the upcoming year is projected to expand by 4.6%, up from a 4.2% forecast made in October.
The positive adjustment to the growth forecasts is linked to China's approval of a CN¥1 trillion ($137 billion) sovereign bond issue and the implementation of measures aimed at bolstering the economy.
Keeping all the above factors in mind, let us delve deeper into the fundamentals of the featured China stock, beginning with number three.
Stock #3: Vipshop Holdings Limited (VIPS)
Headquartered in Guangzhou, the People's Republic of China, VIPS operates online platforms such as in Vip.com; Shan Shan Outlets; and others segments. The company offers womenswear, menswear, sportswear, shoes and bags, accessories, baby and children’s products, skincare and cosmetics, home goods and other lifestyle products.
On October 25, VIPS proudly announced an enhancement in its MSCI ESG rating from "A" to "AA." This upgrade positions VIPS as a leader among more than 300 companies within the consumer discretionary industry.
VIPS’ "AA” rating highlights its standing as a leader in ESG management, reinforcing its credibility in the eyes of the investment community, underscoring the company's commendable strides in sustainable development.
In terms of the trailing-12-month cash per share, VIPS’ $4.76 is 106.4% higher than the $2.31 industry average. Likewise, its trailing-12-month Return On Common Equity (ROCE) of 14.10% is 102.3% higher than the industry average of 10.99%. Furthermore, the stock’s trailing-12-month asset turnover ratio of 1.83x is 83.4% higher than the industry average of 1.00x.
In the third quarter, which ended on September 30, 2023, VIPS’ total net revenues increased 5.3% year-over-year to $3.12 billion, while its gross profit grew 14.9% from the year-ago value to $737.60 million.
During the same period, the company’s income from operations amounted to $210.21 million, up 34.8% from the prior year quarter. Additionally, its net income came in at $168.67 million.
Street expects VIPS’ revenue for the fiscal fourth quarter (ending December 2023) to improve marginally year-over-year to $4.63 billion. While its EPS for the current quarter is expected to come in at $0.70, registering a 31.9% year-over-year increase.
Moreover, the company has an excellent earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.
VIPS’ revenue and EBITDA have increased at CAGRs of 4.8% and 12.4% over the past three years, respectively. Likewise, its net income and EPS have improved at CAGRs of 14.6% and 21.3% over the same period, respectively.
Over the past year, VIPS’ shares have soared 81.5% to close the last trading session at $16.15.
VIPS’ POWR Ratings reflect this promising outlook. The stock has an overall A rating, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Sentiment and a B for Growth, Value, Momentum, and Quality. In the 41-stock B-rated China industry, it is ranked #5. Click here to see VIPS’ rating for Stability.
Stock #2: Sunlands Technology Group (STG)
STG provides online education services through online and mobile platforms in China. It offers various degree- and diploma-oriented post-secondary courses. In addition, the company’s self-taught higher education examination (STE) courses include Chinese language and literature, law, pre-school education, marketing, English, and more.
In terms of the trailing-12-month net income margin, STG’s 31.26% is 604.3% higher than the 4.44% industry average. Likewise, its trailing-12-month Return On Total Assets (ROTA) of 33.65% is 758.8% higher than the industry average of 3.92%.
Furthermore, the stock’s trailing-12-month cash per share of $7.46 is 223.3% higher than the industry average of $2.31.
For the fiscal third quarter, which ended on September 30, 2023, STG’s net revenues amounted to $71.91 million, while its net income stood at $18.04 million and $2.62 per share, respectively. Moreover, in the same period, the company’s total comprehensive income came in at $18.50 million.
Additionally, STG surpassed its revenue estimates in each of the trailing four quarters, which is promising. While its revenue has improved at CAGRs of 1.4% and 8.5% over the past three and five years, respectively.
The stock has surged 58.1% over the past year and 36.1% over the past six months to close the last trading session at $6.26.
STG’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Value and Quality and a B for Sentiment. Within the same B-rated industry, it is ranked #3. Click here to see the other ratings of STG for Growth, Momentum, and Stability.
Stock #1: X Financial (XYF)
XYF provides personal finance services in China. The company offers services as an online marketplace connecting borrowers and investors. Its loan products include Xiaoying credit loan, which consists of Xiaoying card loan; and Xiaoying preferred loan to small business owners, as well as Xiaoying revolving loan.
In terms of the trailing-12-month ROCE, XYF’s 23.35% is 100% higher than the 11.67% industry average. Likewise, its trailing-12-month ROTA of 10.91% is 844.5% higher than the industry average of 1.16%. Furthermore, the stock’s trailing-12-month asset turnover ratio of 0.43x is 105.2% higher than the industry average of 0.21x.
For the fiscal third quarter that ended on September 30, 2023, XYF’s total net revenue increased 56.1% year-over-year to $191.46 million, while its income from operations grew 44.7% from the year-ago value to $59.59 million.
Additionally, the company’s non-GAAP adjusted net income and non-GAAP adjusted net income per share rose 62% and 80% from the prior-year quarter to $51.33 million and $0.17, respectively.
The company’s EPS is expected to improve by 29.3% per annum over the next five years. Moreover, its revenue has grown at CAGRs of 19.7% and 5.7% over the past three and five years, respectively. While its total assets have improved at a CAGR of 8.6% over the past three years.
The stock has surged 112.4% over the past year and 51.2% year-to-date to close the last trading session at $4.39.
It’s no surprise that XYF has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Value and a B for Growth, Stability, and Sentiment. In the same industry, it is ranked first.
In addition to the POWR Ratings we’ve stated above, we also have XYF’s ratings for Momentum and Quality. Get all XYF ratings here.
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.
VIPS shares were trading at $16.15 per share on Thursday afternoon, up $0.40 (+2.54%). Year-to-date, VIPS has gained 18.40%, versus a 20.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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