China is already witnessing a ‘V’ shaped recovery and continues to be the only major economy in the world to register growth this year, according to the International Monetary Fund’s (IMF) World Economic Outlook. China’s economy is expected to overtake 56 countries in the world’s per-capita income rankings through 2025. Moreover, on November 15th, Asia Pacific nations including China signed the world’s largest regional free-trade agreement which covers roughly 2.2 billion people.
Some Chinese companies are going for a secondary listing at the Hong Kong’s exchange following concerns regarding stricter auditing rules of the US stock exchanges. However, Chinese companies are still pursuing the United States market, and half of the cross-border IPOs in America in the first nine months of the year came from China, according to Ernst & Young. Also, Chinese stocks rallied on Joe Biden’s win in the presidential election, as his approach to the US-China trade relationship is expected to be milder.
While the United States is struggling with the rising number of coronavirus cases, the Chinese economy is witnessing growth with significant control over the virus. So, it is wise to bet on Alibaba Group Holding Ltd (BABA), NetEase, Inc. (NTES), and Tencent Music Entertainment Group (TME) which thrived amid the pandemic and are expected to gain more in the future.
Alibaba Group Holding Ltd (BABA)
The leading platform for global wholesale trade, BABA was founded in 1999. The China-based company unlike its competitor Amazon.com, Inc. (AMZN) operates through three core businesses — Alibaba, Taobao, and Tmall. BABA also generates huge revenues from its various affiliates like Cainiao, its logistic affiliate, and Alibaba Cloud. The company’s gross merchandise volume from the 11.11 Global Shopping Festival was reported to be more than $74 billion.
BABA’s total revenue increased 30% year-over-year to $22.8 billion for the quarter ended September 2020. Cloud Computing revenue increased 60% year-over-year to $2.2 billion. Annual active consumers increased by 9.2% year-over-year to 757 million. Mobile Monthly Active Users (MAUs) increased by 12.2% year-over-year to 881 million. EPS increased by 37.2% year-over-year to $0.33.
Analysts expect BABA’s revenue to increase by 61.6% for the quarter ending December 2020, 46.5% in 2021, and 31% in 2022. The company’s EPS is expected to grow 36.2% in 2021, 20.6% in 2022, and at a rate of 3.8% per annum over the next five years. BABA has an impressive earnings surprise history with the company beating consensus EPS estimates in each of the trailing four quarters.
On November 5th, BABA entered into a global agreement with Farfetch and Richemont to accelerate the digitization of the luxury industry. Earlier this month, Cainiao Aeropolis eWTP Hub, a joint venture between BABA and Malaysia Airports commenced operations that are expected to help facilitate 24-hour delivery within Malaysia for e-commerce operators and 72-hour delivery to the rest of the world. Last month, BABA signed a Memorandum of Understanding (MoU) for a strategic partnership with BMW. The stock gained 21.1% year-to-date and is currently trading 24.3% below its 52-week high of $319.32. The suspension of the Ant Group’s IPO in which BABA has a 33% stake is responsible for the recent weakness in its price. This can be an ideal time to bet on the stock to capitalize on the company’s strong financials and growth outlook.
How does BABA stack up for the POWR Ratings?
B for Peer Grade
B for Industry Rank
The stock is also ranked #15 out of 115 stocks in the China group.
NetEase, Inc. (NTES)
Founded in 1997, NTES operates an interactive online community in China. The company has produced some of China’s most renowned and longest-running online PC-client games, including Fantasy Westward Journey Online and New Westward Journey Online II. NTES mainly operates through Online Games, Youdao, INC. (DAO) which is a majority-controlled subsidiary of the company offering intelligent learning services, NetEase Cloud Music business, and its private-label e-commerce platform, Yanxuan.
NTES reported strong second quarter (ended June 2020) results. Net revenues increased 25.9% year-over-year to $2.6 billion. It was mainly driven by the growth in DAO whose net revenue increased 93.1% year-over-year to $88.2 million. Online game services net revenue increased by 20.9% year-over-year to $2 billion. Net income increased 47.7% year-over-year to $642.3 million.
Analysts expect NTES’ revenue to increase 32.2% for the quarter ended September 2020, 22.9% this year, and 16.7% next year. The company’s EPS is expected to grow 27.7% next year and at a rate of 1.6% per annum over the next five years. NTES has an impressive earnings surprise history with the company beating consensus EPS estimates in each of the trailing four quarters.
NTES is expected to report its third-quarter ended September 2020 results on November 19th before the US market opens. NTES started the sale of China’s most prestigious liquor brand, Kweichow Moutai, on its e-commerce platform operated by its subsidiary Yanxuan. NetEase Cloud Music entered into a strategic music partnership with BMG in September. The stock has gained more than 42% year-to-date and is currently trading 19.2% below its 52-week high.
NTES’ POWR Ratings reflect this promising outlook. It has an overall rating of “Buy” with a “B” for Trade Grade, Peer Grade, and Industry Rank. Among the China group, it’s ranked #17.
Tencent Music Entertainment Group (TME)
A subsidiary of Tencent Holdings Limited, TME is the leading online music entertainment platform in China. The company offers one-stop music services and solutions for smart devices, creating a complete music entertainment ecosystem. Providing service to over 800 million highly diverse and engaged users, TME operates through four famous music mobile apps in China – QQ Music, Kugou Music, Kuwo Music, and WeSing.
TME has been witnessing a sustained recovery. TME’s total revenue increased 16.4% year-over-year to $1.1 billion for the third quarter ended September 2020. Revenue from online music services increased 25.9% year-over-year to $342 million owing to TME’s continued expansion of the music library and diversification of content. Online music paying users increased by 46% year-over-year to 51.7 million. EPS of $0.12 surpassed the consensus estimate by 9.1%.
Analysts expect TME’s revenue to increase by 22.4% for the quarter ending December 2020, 22% this year, and 22.1% next year. The company’s EPS is expected to grow 9.8% this year, 20% next year, and at a rate of 2.6% per annum over the next five years. TME has an impressive earnings surprise history with the company beating consensus EPS estimates in each of the trailing four quarters.
Earlier this month, TME renewed its multi-year licensing and cooperation agreement with Merlin. Under this agreement, Merlin will also license into TME’s social community, WeSing. Last month, TME teamed up with partners World Wide Fund for Nature (WWF) and Beijing Youcishan Culture Media Co. Ltd to launch a music and art exhibition, “All Creation: Encounter with Animals” as part of its “TME Art Project.” On a year-to-date basis, TME has rallied 38.1% to close yesterday’s session at $16.21. During the past six months, TME soared 35.5%.
It’s no surprise that TME is rated “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, and a “B” for Buy & Hold Grade, Peer Grade, and Industry Rank.
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BABA shares were trading at $254.98 per share on Wednesday afternoon, down $1.82 (-0.71%). Year-to-date, BABA has gained 20.22%, versus a 13.88% 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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