According to the National Health Commission, China posted a record daily high of 40,347 cases of new COVID-19 infections. Mega-cities continue to struggle to contain outbreaks, with Chongqing and Guangzhou recording the bulk of new cases. Chinese President Xi Jinping’s administration imposed “zero-Covid” strict measures to tame the virus.

However, citizens fed up with President Jinping’s zero-Covid policy recently showed widespread protests. Therefore, the country’s COVID policy is leading to uncertainties for investors. The protests around the country are being watched for any sign of political instability, something many investors had not considered in authoritarian China, where Xi recently secured a third leadership term.

However, China’s top health officials have pledged to rectify COVID-19 control measures to reduce their impact on people’s lives. The National Health Commission, in a press briefing in Beijing, also said that the lockdowns to suppress the spread of the virus should be lifted “as quickly as possible.’

While we think fundamentally strong China stock Tarena International, Inc. (TEDU) might be worth buying now, GDS Holdings Limited (GDS) might be best avoided.

Stock to Buy:

Tarena International, Inc. (TEDU)

TEDU provides professional education services through full-time and part-time classes under the Tarena brand in the People’s Republic of China. It operates through two segments, Adult Professional Education and Childhood & Adolescent Quality Education Services. The company is headquartered in Beijing, the People’s Republic of China.

In terms of trailing-12-month EV/Sales, TEDU is currently trading at 0.16x, which is 85.6% lower than the industry average of 1.14x. Its forward Price/Sales multiple of 0.14 is 83.7% lower than the industry average of 0.86.

TEDU’s trailing-12-month gross profit margin of 54.12% is 51.47% higher than the industry average of 35.73%. Also, the stock’s trailing-12-month asset turnover ratio of 1.46% is 44.15% higher than the 1.01% industry average.

TEDU’s net revenue increased 11.4% year-over-year to RMB648.82 million ($90.08 million) in the fiscal second quarter ended June 30. Its gross profit grew 27.9% from the year-ago value to RMB376.51 million ($52.27 million). The company’s non-GAAP net income came in at RMB49.1 million ($6.81 million) compared to a non-GAAP net loss of RMB72.5 million in the same quarter last year.

The stock has gained 21.5% over the past month to close its last trading session at $5.60.

TEDU’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

TEDU is rated an A in Growth and a B in Value and Quality. Within the 42-stock China group, it is ranked first.

To see additional POWR Ratings for Momentum, Sentiment, and Stability for TEDU, click here.

Stock to Avoid:

GDS Holdings Limited (GDS)

GDS develops and operates data centers in the People’s Republic of China and provides colocation services, managed hosting services, managed cloud services, and consulting services. The company is headquartered in Shanghai, the People’s Republic of China.

In terms of forward EV/EBIT, GDS is currently trading at 101.60x, which is 529.5% higher than the industry average of 16.14x. Its forward EV/Sales multiple of 5.57 is 108% higher than the industry average of 2.68.

The stock’s trailing-12-month gross profit margin of 21.24% is 57.46% lower than the industry average of 49.94%. Its trailing-12-month asset turnover ratio of 0.13% is 79.18% lower than the 0.63% industry average.

In the fiscal third quarter ended September 30, 2022, GDS’ net loss rose 12.8% year-over-year to RMB339.66 million ($47.16 million) while its loss per share amounted to RMB0.24 ($0.03). The company’s comprehensive loss increased 97.1% year-over-year to RMB560.33 million ($77.79 million).

GDS EPS is expected to decline 20.9% year-over-year to $0.37 in the fiscal fourth quarter ending December 2022. Its revenue is likely to fall 2.7% year-over-year to $334.47 million in the same quarter. In addition, the company has failed to surpass the consensus EPS estimates in three of the trailing four quarters.

The stock has declined 75.2% year-to-date, closing its last trading session at 11.71.

GDS’ poor prospects are reflected in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our proprietary rating system.

It is rated a D in Momentum and Quality and is ranked #39 in the China group.

Click here to see additional GDS ratings for Growth, Value, Stability, and Sentiment.

GDS shares were trading at $13.80 per share on Tuesday afternoon, up $2.09 (+17.85%). Year-to-date, GDS has declined -70.74%, versus a -15.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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