China has been the fastest country to recover from the pandemic-induced economic slowdown and was the only economy to generate growth in 2020. However, the past year has been rough for Chinese stocks. An ongoing trade dispute with the U.S.  contributed to much market uncertainty. In fact, the NYSE today announced that it will move forward with a plan to delist three Chinese companies.

Despite the unabated conflict between the world’s two largest economies, several Chinese companies have grown at an enviable pace, which has translated into strong price momentum for their stocks.

Though some Chinese players are currently under strict regulatory scrutiny, analysts are bullish on the Chinese yuan in anticipation of some relief on the trade-war front when the Biden Administration is seated later this month. As such,  it could be wise to bet on fundamentally strong Chinese stocks like NetEase, Inc. (NTES) and Bilibili Inc. (BILI) now.

NetEase, Inc. (NTES)

NTES is one of China’s leading internet and online game services providers that delivers online services focusing on content, community, communication, and commerce in China, Japan, and North America. The company operates in three segments – Online Games Services, Youdao, and Innovative Businesses & Others.

In December, NetEase Cloud Music announced a new initiative to foster the growth of derivative music content creators to cater to the country’s booming music industry. The company also announced last month  the launch of the next generation of its dictionary pen series, Youdao Dictionary Pen 3. The product uses innovative technologies such as like the “Tap and Check” function and the “Interactive Reading” function.

In the third quarter, ended September 30, 2020, NTES recorded a 27.5% year-over-year rise in top-line revenue to $2.7 billion. It generated 74% of its revenue from mobile games as the online games unit’s revenue rose 20.2% year-over-year. Youdao net revenues came in at $132 million, increasing 159% compared to the year-ago quarter. However, adjusted EPS for the quarter fell 26% to $0.80.

NTES’ strength in the gaming business is bolstered by its diverse and growing portfolio. The company’s robust pipeline of games is ready for launch across multiple genres to both domestic and global players in the coming quarters. Hence, analysts expect NTES’ current-year revenue and EPS to grow 18.1% and 15.6%, respectively.

NTES gained 47.5% in the previous year and is up nearly 18.8% in the past month. The stock closed yesterday’s trading session at $103.61, after hitting its 52-week high of $105.80.

How does NTES stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

B for Industry Rank

A for Overall POWR Rating

The stock is also ranked #12 of 119 stocks in the China group.

Bilibili Inc. (BILI)

BILI provides online entertainment services for the young  in the People’s Republic of China. It offers a platform that covers a range of genres and media formats, including videos, live broadcasting, and mobile games. It operates primarily via four segments – Mobile games, Value-added service (VAS), Advertising, and E-commerce and Others.

BILI is likely to file for a secondary listing in Hong Kong in the coming few weeks, which could raise more than $2 billion. Back in August, the company entered a definitive subscription agreement with Huanxi Media Group Limited, a company principally engaged in media- and entertainment-related businesses. BILI invested nearly $66.2 million for a 9.9% stake and gained exclusive online broadcasting rights to existing and upcoming releases of Huanxi Media-owned films and TV drama series.

Its total revenue soared 74% year-over-year to a record $475 million in the third quarter of 2020 on the back of solid growth across all segments. Average monthly active users (MAUs) increased 54% to a new quarterly level of 197 million. In fact, average monthly paying users reached 15.0 million, an 89% increase from the same period last year. However, the company is still not profitable and reported an adjusted loss of $0.41 per share.

In the third-quarter, BILI noted , “Our effective user growth strategy and expanding content library helped us to reach an even broader audience. In August, our MAUs exceeded 200 million, marking a new monthly record.”

The company is efficiently improving its operating leverage and striving hard to grow the amount of professional user-generated video (PUGV) available on its platform. In line with its  progress, Wall Street analysts expect BILI’s revenue and EPS to grow 46.2% and 38.7%, respectively, this year.

BILI gained 288.2% in 2020 and is up nearly 56% in the past month. The stock closed yesterday’s trading session at $105.60 and is currently trading just 2.3% below its 52-week high of $108.05.

It is no surprise that BILI is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Peer Grade and Buy & Hold Grade, and a “B” for Industry Rank. Among the 119 stocks in the China industry, it is ranked #15.

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NTES shares were unchanged in after-hours trading Thursday. Year-to-date, NTES has gained 16.83%, versus a 1.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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