The past year has been rough for Chinese stocks. The ongoing US-China trade war coupled with privacy issues surrounding some Chinese firms contributed to a lot of volatility. However, despite the persistent issues between the top two economies of the world, several Chinese companies are growing revenue and earnings at an enviable pace. Key industries in China have recovered significantly, due to the country’s control over the deadly virus.

The Chinese economy is rebounding faster than other major economies of the world after the slump caused by the spread of the coronavirus. China is the only economy in the world that has witnessed economic growth so far this year. According to the IMF World Economic Outlook, the country’s growth is expected to be 8.2% in 2021. Moreover, Chinese stocks rallied on Joe Biden’s win in the Presidential election as there could be some relief for the economy from the trade war front when Biden takes charge of the White House. Consequently, analysts are bullish on 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 the country’s faster recovery. NetEase, Inc. (NTES), NIO Inc. (NIO), TAL Education Group (TAL), and Dada Nexus Ltd. (DADA) are fundamentally strong companies that are expected to witness solid growth next year, which could translate into strong price momentum for their stocks.

NetEase, Inc. (NTES)

NTES is one of China’s leading internet and online game services providers that provides 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.

NTES marked significant progress on a strategic partnership with China’s most prestigious liquor brand, Kweichow Moutai, last month by making its liquor available on its e-commerce platform, operated by its subsidiary, NetEase Yanxuan. Moreover, in September, another NTES subsidiary, the NetEase Cloud Music, an interactive music streaming service provider, announced a strategic music partnership with BMG to gain access to the latter’s extensive global music catalogue.

In the last reported quarter, NTES recorded a 27.5% year-over-year rise in top-line to $2.7 billion. The company 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 the company’s revenue to increase 24.4% in the current year and 18% next year. NTES’ EPS is expected to grow 3% in the current year and 14.6% next year.

How does NTES stack up for the POWR Ratings?

B for Trade Grade

A for Buy & Hold Grade

B for Peer Grade

B for Industry Rank

B for Overall POWR Rating

The stock is also ranked #16 out of 115 stocks in the China industry.

NIO Inc. (NIO)

NIO is a Shanghai-based electric vehicles producer known as the “Tesla of China.” The company designs, manufactures, and sells premium cars under the ES8, EVE, and EP9 brand names. It is also involved in the provision of energy and service packages to its users developing e-powertrains, battery packs, and other components. NIO has a strategic collaboration with Mobileye N.V. for the development of automated and autonomous vehicles.

NIO delivered 5,055 vehicles in October 2020 alone, recording a fresh monthly high with an increase of 100.1% year-over-year. The company has delivered 31,430 vehicles so far this year, rising 111.4% compared to the same period last year. Cumulative deliveries of ES8, ES6, and EC6 as of October 31, 2020 reached 63,343.

Total revenue increased 146.4% year-over-year to $666.6 million in the third quarter of 2020. Vehicle margin came in at 14.5%, compared to the quarter-ago value of 9.7%. NIO is still not generating profit. However, quarterly losses per share continue to narrow. The company reported an adjusted loss of $0.82 per share for the quarter, significantly improving from the quarter-ago loss of $1.08 per share.

NIO is immensely benefiting from its innovative Battery as a Service (BaaS) subscription model. The company recently launched the 100kWh battery pack with battery upgrade plans. The cell-to-pack battery pack has a realized 37% higher energy density than the previous 70kWh battery. Moreover, NIO is planning to launch its EVs in the European market by 2021. Hence, analysts expect the company’s revenue to increase 112.5% in the current year and 104.8% next year. NIO’s EPS is expected to grow 56% in the current year and 48.5% next year.

It’s no surprise that NIO is rated a “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 115 stocks in the China industry, it’s ranked #2.

TAL Education Group (TAL)

TAL is a leading education and technology enterprise in the People’s Republic of China that provides K-12 after-school tutoring services. The acronym “TAL” stands for “Tomorrow Advancing Life.” The company offers comprehensive tutoring services to students from preschool to the twelfth grade through three flexible class formats – small classes, personalized premium services, and online courses.

TAL has recently announced that a global growth investment firm has purchased $1.5 billion-worth of newly issued Class A common shares of the company. Following the transaction, the investor holds, taking into account its existing holding, approximately 8.35% of the company’s outstanding shares.

TAL generated a net revenue of $1.103 billion in its second quarter that ended August 2020, increasing 20.8% year-over-year. The increase was mainly driven by a rise in total student enrollments of normal priced long-term courses, which increased by 65% to approximately 5,632,210. This increase was in turn driven by the growth of enrollments in the small class offerings and online courses. Non-GAAP EPS came in at $0.08, surging 872% compared to the year-ago value of $0.01 per share.

TAL is still witnessing lingering pressure on its offline business. However, the company’s online courses are exhibiting strong momentum and are efficiently serving ever-changing customer demand. Analysts expect TAL’s revenue to increase 33% in the current year and 43.1% next year. The company’s EPS is expected to grow 493% in the current year and 109.1% next year.

TAL’s POWR Ratings reflect a promising outlook. It has an overall rating of “Buy” with a “B” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Among the 115 stocks in the China industry, it’s ranked #18.

Dada Nexus Ltd. (DADA)

DADA operates platforms of local on-demand retail and delivery in China. The company operates JDDJ, a local on-demand retail platform, and Dada Now, a local on-demand delivery platform in China. The company’s two platforms are interconnected and mutually beneficial. DADA was founded in 2014, but the company got listed as recent as June 2020.

DADA has recently received grants of funds by 2020 Shanghai Artificial Intelligence Innovation and Development Program to further enhance the digital transformation capability of empowering retailers based on artificial intelligence and big data, and promote the vigorous development of the online economy.

The company has recently partnered with more than 500 Pagoda stores, a fresh fruit chain retailer, to provide omni-channel order delivery. The number of Dada-Pagoda partnered stores is expected to reach 2,000 by the end of the year. DADA also announced record sales during the 2020 Singles Day Shopping Festival, which ran from November 3^rd to 12^th across China. JDDJ’s sales reported on Singles Day more than doubled year-over-year, and Dada Now achieved various milestones, including setting a new high for single-hour order deliveries.

In the third quarter that ended September 2020, total net revenue increased 85.5% year-over-year. The company delivered 74.4 million orders on its Dada Now platform during the quarter. Consequently, total gross merchandise volume of JDDJ surged 131% compared to the year-ago value. However, the company is still not profitable and reported an operating loss of $68.57 million.

DADA is witnessing strong growth in its user base and further strengthening its position with market share expansion. The number of active consumers in the last reported quarter came in at 37.3 million, an increase of 77.1% year-over-year. JDDJ remains the largest local on-demand retail platform in the China supermarket segment with a 24% market share in the first nine months of 2020, up from 21% last year. Hence, the market expects the company’s revenue to increase 435.5% in the current year and 62% next year. DADA’s EPS is expected to grow 53% next year.

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NTES shares were trading at $93.31 per share on Wednesday afternoon, down $4.21 (-4.32%). Year-to-date, NTES has gained 53.13%, versus a 14.17% 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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