Despite facing a complicated external environment and other macro uncertainties, China is expected to maintain its role as a critical engine of regional and global economic growth, given its large domestic market, complete industrial system, and abundant human resources.
Thus, fundamentally strong China stocks Ping An Insurance (Group) Company of China, Ltd. (PNGAY), Sunlands Technology Group (STG), and FinVolution Group (FINV) could be ideal buys for solid returns this year.
China’s economy grew at a faster-than-expected pace in the third quarter of 2023. Data released by the National Bureau of Statistics showed that the gross domestic product (GDP) rose 4.9% from a year ago in July-September, compared to analysts’ estimates in a Reuters poll for 4.4% growth.
As per Finance Minister Lan Fo’an, the Chinese economy has gained a firm footing in 2023, especially after the faster-than-expected expansion in the third quarter. He stated that China’s economy will maintain an optimistic trend in the fourth quarter, and the nation will remain a vital engine of steady growth of the global economy.
British think tank Oxford Economics anticipated China’s fourth-quarter 2023 GDP to grow by 1.2% on a seasonally adjusted quarter-on-quarter basis, resulting in an annual growth rate of 5.2%, a revision of its earlier forecast of 5.1%.
Meanwhile, the International Monetary Fund (IMF) upgraded China’s 2023 and 2024 GDP growth forecasts. According to IMF, the Chinese economy is expected to grow 5.4% last year, having made a “strong” post-COVID rebound and an upward revision to its prior forecast of 5% growth.
For 2024, the IMF projected gross domestic product growth of 4.6%, which is up from the 4.2% forecast contained in its World Economic Outlook (WEO), published in October.
This upward revision followed a decision by China’s top parliament body to approve a 1 trillion yuan ($137 billion) sovereign bond issue and a bill to allow local governments to frontload part of their 2024 bond quotas in an effort to support the economy.
According to Swiss bank UBS Group, Chinese stocks’ darkest days may be over after three consecutive years of losses dealt a $1.40 trillion wipeout, as corporate earnings rebound amid a ramp-up in policy support. Profits for industrial companies soared 29.5% year-over-year in November, posting growth for a straight fourth month.
A surge in profits for industrial companies, which essentially move in tandem with earnings for Chinese domestic listed companies, is probably a signal that the gloom is lifting, said Meng Lei, a UBS strategist, at the banks annual Greater China conference in Shanghai on Monday.
“We believe company earnings growth [in 2024] and government support through monetary, lending and fiscal policies will restore investor confidence,” added Meng. “A turnaround is expected to occur after companies post a jump in their profit in the first-quarter earnings reports.”
Considering these favorable trends, let’s take a look at the fundamentals of the three best China stock picks, starting with number 3.
Stock #3: Ping An Insurance (Group) Company of China, Ltd. (PNGAY)
Based in Shenzhen, China, PNGAY offers financial products and services for banking, insurance, asset management, and technology businesses. It operates through Life and Health Insurance; Property and Casualty Insurance; Banking; Trust; Securities; Asset Management; and Technology segments. Also, it provides annuity insurance, real estate investment, futures brokerage, and more.
In terms of forward EV/Sales, PNGAY is trading at 3.08x, 3.7% lower than the industry average of 3.20x. Likewise, the stock’s forward Price/Sales of 0.67x is 74.8% lower than the industry average of 2.65x.
For the nine months that ended September 30, 2023, PNGAY’s insurance revenue increased 2.2% year-over-year to RMB 404.48 billion ($56.58 billion), and its total revenue was RMB 792.53 billion ($110.87 billion), up 6% from the prior year’s quarter. Total comprehensive income for the period rose 3.1% year-over-year to RMB 91.03 billion ($12.73 billion).
Furthermore, as of September 30, 2023, the company’s total assets came in at RMB 11.47 trillion ($1.60 trillion), compared to RMB 11.01 trillion ($1.54 trillion) as of December 31, 2022.
Analysts expect PNGAY’s revenue for the fiscal year (ended December 2023) to increase 5.5% year-over-year to $113.35 billion. For the fiscal year 2024, the company’s revenue is expected to grow 7.4% from the prior year to $121.77 billion. Moreover, PNGAY has surpassed the consensus revenue estimates in three of the trailing four quarters.
Shares of PNGAY have declined 5.4% over the past month to close the last trading session at $8.10.
PNGAY’s strong 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 POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
PNGAY has a B grade for Growth, Value, Momentum, and Stability. It has ranked #14 of 40 stocks in the A-rated China industry.
In addition to the POWR Ratings I’ve just highlighted, you can access PNGAY’s ratings for Sentiment and Quality here.
Stock #2: Sunlands Technology Group (STG)
STG, headquartered in Beijing, China, offers online education services through online and mobile platforms. It provides several degree- and diploma-oriented post-secondary courses. Also, the company’s self-taught higher education examination (STE) courses include Chinese language and literature, law, preschool education, English, marketing, business management, and more.
STG’s trailing-12-month gross profit margin and EBIT margin of 87.84% and 28.37% favorably compared to the respective industry averages of 35.38% and 7.60%. Also, its trailing-12-month net income margin of 30.33% is 571% higher than the industry average of 4.52%.
Further, the stock’s trailing-12-month ROTC and ROTA of 150.59% and 31.48% are significantly higher than the industry averages of 6.05% and 4%, respectively.
The company’s Board of Directors authorized a share repurchase program on December 6, 2021, under which it may repurchase up to $15 million of Class A ordinary shares in the form of ADSs over the next two years. As of November 31, 2023, STG had repurchased an aggregate of 466,021 ADSs for nearly $2.20 million under the share repurchase program.
During the third quarter that ended on September 30, 2023, STG reported net revenues of $71.91 million. Its non-GAAP gross billings were $53.40 million, an increase of 6.7% year-over-year. The company’s net income came in at $18.04 million, or $2.62 per share, respectively.
In addition, the company had $103 million of cash, cash equivalents and restricted cash and $16.80 million of short-term investments as of September 30, 2023.
STG’s stock has gained 7.8% over the past month and 136.1% over the past six months to close the last trading session at $8.90.
STG’s 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.
The stock has an A grade for Value and Quality and a B for Sentiment. Within the A-rated industry, STG is ranked #6 among 40 stocks.
To see the additional ratings of STG for Growth, Momentum, and Stability, click here.
Stock #1: FinVolution Group (FINV)
Headquartered in Shanghai, China, FINV operates within the online consumer finance industry. The company runs a fintech platform that is empowered by proprietary technologies and connects underserved borrowers with financial institutions internationally.
FINV’s trailing-12-month gross profit margin of 78.68% is 30.3% higher than the 60.37% industry average. The stock’s trailing-12-month EBITDA margin of 53.81% is 142.8% higher than the 22.16% industry average. Moreover, its trailing-12-month levered FCF margin of 54.20% is 213.5% higher than the industry average of 17.29%.
In terms of forward non-GAAP P/E, PNGAY is trading at 3.84x, 63% lower than the industry average of 10.38x. Likewise, the stock’s forward EV/Sales and EV/EBITDA of 0.11x and 0.54x are 96.5% and 95.3% lower than the industry averages of 3.20x and 11.5%, respectively.
On August 28, 2023, FINV’s Board of Directors approved the company’s third repurchase program that allows it to repurchase its own Class A ordinary shares in the form of ADSs with an aggregate value of up to $150 million, effective from August 29, 2023, until August 29, 2025.
During the first nine months of 2023, the company deployed a total of $65.90 million to repurchase its own Class A ordinary shares in the form of ADSs in the market. FINV had cumulatively repurchased its own Class A ordinary shares in ADSs with a total aggregate value of nearly $248.20 million as of September 30, 2023.
FINV’s net revenue increased 7.6% year-over-year to $438.26 million during the fiscal third quarter that ended September 30, 2023. The revenue growth was primarily due to the rise in guarantee income and post-loan facilitation service fees. Its non-GAAP net profit per ADS grew 1.4% from the year-ago value to $0.30.
As of September 30, 2023, the company’s cash and cash equivalents stood at $781.35 million, and short-term investments, mainly in wealth management products and term deposits, were $387.10 million.
The consensus revenue estimate of $1.79 billion for the fiscal year (ended December 2023) reflects a 10.5% year-over-year improvement. Likewise, the consensus EPS estimate of $1.23 for the same period indicates a 4.6% rise year-over-year.
For the fiscal year 2024, Street expects FINV’s revenue and EPS to increase 12.8% and 12.9% year-over-year to $2.02 billion and $1.39, respectively.
FINV’s shares have surged 4.3% over the past month to close its last trading session at $4.74.
FINV’s promising prospects are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
FINV has a B grade for Value, Momentum, Quality, and Stability. It is ranked #5 in the 40-stock A-rated China industry.
Click here to access the other FINV ratings (Sentiment and Growth).
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.
PNGAY shares were unchanged in premarket trading Thursday. Year-to-date, PNGAY has declined -10.20%, versus a 0.26% 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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