China continues to be the only major economy in the world to witness growth this year, according to the International Monetary Fund’s (IMF) World Economic Outlook released earlier this month. While China’s GDP is predicted to expand by 1.9% this year, the growth could accelerate to 8.2% next year. The major driver behind this growth is the world’s second-largest economy’s ability to recover from the pandemic faster than any other country.
While a second wave of infections is engulfing Europe and the United States, China has been able to significantly control the spread of the deadly virus. According to IMF Chief Economist Gita Gopinath, excluding China, the cumulative growth for the world economy will be negative in 2020 and 2021.
Moreover, there could be some relief for the economy from the trade war front if Biden takes charge of the White House. Analysts say a Biden win could be bullish for the Chinese yuan.
While the uncertainty is increasing in the domestic economy, it could be wise to bet on Chinese stocks to take advantage of that country’s recovery. Alibaba Group Holding Ltd (BABA), NIO Inc. (NIO), New Oriental Education & Technology Group, Inc. (EDU), and Huazhu Group Limited (HTHT) are four stocks that are fundamentally strong as well.
Alibaba Group Holding Ltd. (BABA)
Based in China, BABA has become an empire in itself. The leading platform for global wholesale trade is divided into three core businesses: Alibaba, Taobao, and Tmall. BABA’s cloud-computing arm is expected to turn profitable by March 2021. BABA’s financial affiliate Ant Group Inc. will go public soon by raising around $34.5 billion, making it the biggest IPO ever. The financial behemoth will hold dual listings in Shanghai and Hong Kong.
BABA’s revenue increased 34% year-over-year to $21.7 billion for the first quarter ended June 2020, driven by the robust revenue growth of China commerce retail and cloud computing businesses. Cloud Computing revenue increased 59% year-over-year to $1,747 million for the quarter. The company’s revenue from digital media and entertainment increased 9% year-over-year to $990 million due to an increase in online games and membership subscriptions.
Analysts expect BABA’s revenue to increase 55.8% for the second quarter ended September 2020 and 25.9% next year. The company’s EPS is expected to increase by 16.2% for the about-to-be-reported quarter, 25.6% next year, and at a rate of 3.5% per annum over the next five years.
On October 26th, BMW and Alibaba signed a Memorandum of Understanding (MoU) for strategic partnerships in Beijing to promote digital transformation across businesses. BABA also unveiled its plans for the 2020 11.11 Global Shopping Festival, which is continuing for 12 years now. BABA has an impressive earnings surprise history with the company beating consensus EPS estimates in each of the trailing four quarters. The stock gained 49.5% year-to-date.
How does BABA stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
A for Industry Rank
A for Overall POWR Rating
You can’t ask for better. The stock is also ranked #1 out of 115 stocks in the China group.
Note that BABA is one of 5 stocks in the Reitmeister Total Return portfolio. Learn more here.
NIO Inc. (NIO)
Often touted as the “Tesla of China,” NIO manufactures and markets Electric Vehicles (EVs) under the brand names EP9, EVE, and ES8. Based in Shanghai, China, the company is also into self-driving technology and offers a battery swap service.
NIO experienced significant growth in vehicle delivery in September 2020, but the stock was hit due to the broad market sell-off amid the surge in coronavirus cases in Europe and the United States and the diminishing hope for fiscal aid. NIO set a monthly record delivering 4,708 vehicles in September, representing 133.2% year-over-year growth. The company delivered 12,206 vehicles for the third quarter ended September, indicating an increase of 154.3% year-over-year. NIO’s total revenue increased by 171.1% sequentially to $526.4 million.
Analysts expect NIO’s revenue to increase by 94.8% for the quarter ending December 2020, and 79.2% for 2021. The company’s EPS is expected to increase by 52% in the current year and 34.7% next year. Last month, NIO launched a new charging service plan named Power Up Plan at Auto China 2020. The stock gained a massive 607.5% year-to-date. NIO’s earnings surprise history looks impressive with the company missing the consensus estimate in just one of the trailing four quarters. The company should be able to materialize the growing demand on the cusp of profound change.
NIO’s POWR Ratings reflect this promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Among the China stocks, it’s ranked #3.
New Oriental Education & Technology Group, Inc. (EDU)
EDU is the largest provider of private educational services in China. Founded in 1993, the company has a network of 112 schools, 1472 learning centers, and 12 bookstores as of August 2020. EDU offers a wide range of educational programs, services, and products. The company helps meet the needs of students in each stage of life by offering English and other foreign language training, overseas and domestic test preparation courses, all-subjects after-school tutoring, primary and secondary school education, educational content, and software as well as online education.
EDU’s total student enrolments increased 13.5% year-over-year to approximately 2,961,100 for the fiscal first quarter ended August 2020. The total number of schools and learning centers increased by 16.7% year-over-year to 1472 in the same quarter. As the pandemic gradually fades in China, the company’s growth is reflected in the significant jump in student enrolments. K-12 all-subjects after-school tutoring business increased 8% year-over-year, U-Can middle and high school all-subjects after-school tutoring business grew by approximately 9% year-over-year, and POP Kids program increased roughly 4% year-over-year.
Analysts expect EDU’s revenue to increase by 17.5% for its fiscal year 2021 and 32.3% for 2022. The company’s EPS is expected to increase by 21.8% in fiscal 2021, 41.7% in 2022, and at a rate of 30.5% per annum in the next five years. EDU’s earnings surprise history looks impressive with the company missing the consensus estimate in just one of the trailing four quarters. The stock gained 40.6% year-to-date. With China’s economy recovering much faster than the rest of the world, the company is expected to grow further in the coming months with more schools reopening.
It’s no surprise that EDU is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. In the China industry, it is ranked #4.
Huazhu Group Limited (HTHT)
Founded in 2005, HTHT is the 12th largest hotel group globally. This China-based hotel group’s brand includes Hi Inn, Elan Hotel, HanTing Hotel, JI Hotel, Starway Hotel, Orange Hotel, Crystal Orange Hotel, Manxin Hotel, Madison Hotel, Joya Hotel, and Blossom House. HTHT completed the acquisition of Deutsche Hospitality in January adding five more brands to its portfolio. HTHT has a total of 6187 hotels and 2375 unopened hotels in the pipeline as of June 30, 2020.
HTHT’s net revenues from managed and franchised hotels increased 45.4% year-over-year to $96 million in the second quarter ended June 2020. However, the company’s net revenues from leased and owned hotels decreased by 18.5% year-over-year to $175 million for the quarter. The company resumed operations for approximately 96% of its hotels in the second quarter.
Analysts expect HTHT’s revenue to increase by 2.6% for the quarter ended September 2020 and 65.7% in the financial year 2021. The company’s EPS is expected to grow 284.5% next year and at a rate of 5.5% per annum over the next five years. The stock gained more than 51% since hitting its 52-week low of $25.01 in mid-March.
Last month, HTHT announced the launch of its Hong Kong public offering. In the words of Ji Qi, founder, Executive Chairman, and CEO of Huazhu, “Market consolidation will accelerate, and Huazhu has prepared to expand our market share after the crisis. For the next three years, we expect to penetrate additional lower-tier cities in China where customers’ brand awareness and demand for quality have risen.”
HTHT’s strong fundamentals are reflected in its POWR Ratings, it has a “Buy” rating with an “A” in Industry Rank and a “B” in Trade Grade, Buy & Hold Grade, and Peer Grade. Within the China group, it’s ranked #21.
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BABA shares were trading at $306.91 per share on Wednesday afternoon, down $10.23 (-3.23%). Year-to-date, BABA has gained 44.70%, versus a 3.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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