The Chinese stock market has had a difficult start to the year, but the Chinese government is now promising to invest more money into the economy to spur growth and open up its financial industry even further for international investors. It is also looking to stabilize its stock market through various positive measures.

Amid this backdrop, it could be wise to buy fundamentally strong Chinese stocks Youdao, Inc. (DAO), Ping An Insurance (Group) Company of China, Ltd. (PNGAY), and China Automotive Systems, Inc. (CAAS).

Before diving deeper into the fundamentals of these Chinese stocks, let’s discuss what’s taking place in China’s stock market and which factors are expected to shape its prospects.

Chinese stocks have had a torrid run over the past few years, with about $6 trillion being wiped off the value of Chinese and Hong Kong stocks. The Shanghai Composite Index has declined 11% over the past year, and the Hang Seng Index has fallen 28.2% during the same period. When compared to the MSCI Emerging Markets’ 10.3% gain last year, the MSCI China Index was down 11%.

The Chinese economy grew 5.2% in 2023, beating government estimates of 5%. However, this marked its slowest pace of economic expansion since 1990, excluding the three COVID-impacted years through 2022.

The torrid run of its stock market over the past few years has been fueled by factors like a real estate downturn, subdued consumption, frequent Covid lockdowns, deflation, record youth unemployment, declining birth rates, and policies that led to a crackdown on private enterprises and Big Tech.

However, Beijing has been taking measures to boost the stock market and improve liquidity. Earlier this week, during a cabinet meeting led by Premier Li Qiang, the decision was made to implement measures aimed at bolstering market confidence. Qiang urged officials to ramp up medium and long-term fund injections in the capital market.

Moreover, People’s Bank of China’s Governor Pan Gongsheng said that the reserve requirement ratio would be cut by 50 basis points on February 5, helping aid liquidity in the economy. The reduction would provide one trillion yuan ($140.96 billion) in long-term liquidity, spurring economic growth.

Also, China’s securities regulators have asked a few hedge fund managers to restrict short-selling in its stock index futures market in an effort to stabilize the stock market. Furthermore, Chinese policymakers have been reported to be considering injecting about 2 trillion yuan ($281.91 billion) to stabilize its stock market by using the offshore accounts of Chinese state-owned enterprises.

Considering this favorable backdrop, let’s assess the fundamentals of the three best China stock picks, beginning with the third choice.

Stock #3: Youdao, Inc. (DAO)

Headquartered in Hangzhou, China, DAO is an internet technology company that provides online services in the field of content, community, communication, and commerce in China. It operates through three segments: Learning Services, Smart Devices, and Online Marketing Services. It offers online knowledge tools, learning services, STEAM courses, smart devices, education digitalization, and online marketing services.

In terms of forward EV/Sales, DAO’s 0.78x is 35.7% lower than the 1.21x industry average. Its 0.55x forward Price/Sales is 38.5% lower than the 0.90x industry average.

DAO’s total net revenues for the fiscal third quarter ended September 30, 2023, rose 9.7% year-over-year to RMB1.54 billion ($217.07 million). Its gross profit increased 13.1% over the prior-year quarter to RMB859.64 million ($121.17 million). The company’s total gross margin stood at 55.9%, compared to 54.2% in the prior year quarter.

Also, its non-GAAP net loss from continuing operations attributable to ordinary shareholders of the company narrowed 59.1% year-over-year to RMB67.25 million ($9.48 million). Also, its non-GAAP net loss from continuing operations per ADS narrowed 58.6% year-over-year to RMB0.55.

Analysts expect DAO’s revenue for the quarter ending March 31, 2024, to increase 12.2% year-over-year to $184.49 million. Over the past month, the stock has declined 12.2% to close the last trading session at $3.45.

DAO’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It is ranked #13 out of 40 stocks in the B-rated China industry. It has a B grade for Growth and Value. Click here to see DAO’s additional ratings for Momentum, Stability, Sentiment, and Quality.

Stock #2: Ping An Insurance (Group) Company of China, Ltd. (PNGAY)

Based in Shenzhen, China, PNGAY provides financial products and services for insurance, banking, asset management, and technology businesses in China. Its segments include Life and Health Insurance, Property and Casualty Insurance, Banking, Trust, Securities, Technology, and Other Asset Management. It offers wealth management and credit card services to individual customers, annuity insurance, futures brokerage, etc.

In terms of trailing-12-month GAAP P/E, PNGAY’s 9.38x is 14.9% lower than the 11.03x industry average. Its 0.89x forward Price/Sales is 66.6% lower than the 2.66x industry average.

For nine months ended September 30, 2023, PNGAY’s total revenue rose 6% year-over-year to RMB792.53 billion ($111.71 billion). Its insurance revenue increased 2.2% over the prior-year period to RMB404.48 billion ($57.01 billion). The company’s profit for the period stood at RMB108.11 billion ($15.24 billion). Also, its EPS attributable to ordinary equity holders of the parent came in at RMB4.85.

For the quarter ended December 31, 2023, PNGAY’s revenue is expected to increase 7.7% year-over-year to $24.66 billion. Over the past month, the stock has gained 3.9% to close the last trading session at $8.78.

PNGAY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.

Within the same industry, it is ranked #6. It has an A grade for Momentum and a B for Growth, Value, and Stability. To see PNGAY’s ratings for Sentiment and Quality, click here.

Stock #1: China Automotive Systems, Inc. (CAAS)

Headquartered in Jingzhou, China, CAAS manufactures and sells automotive systems and components in China and internationally. It produces rack and pinion power steering gears for cars and light-duty vehicles, integral power steering gears for heavy-duty vehicles, power steering parts for light-duty vehicles, sensor modules, automobile steering systems and columns, and automobile electronic and hydraulic power steering systems and parts.

In terms of trailing-12-month EV/Sales, CAAS’ 0.11x is 90.7% lower than the 1.21x industry average. Its 0.20x trailing-12-month Price/Sales is 77.5% lower than the 0.90x industry average. Likewise, its 0.34x trailing-12-month Price/Book is 84% lower than the 2.11x industry average.

CAAS’s net product sales for the third quarter ended September 30, 2023, increased marginally year-over-year to $137.54 million. Its gross profit rose 18.4% over the prior-year quarter to $24.76 million. The company’s net income attributable to the parent company’s common shareholders increased 27% year-over-year to $9.49 million.

Also, its net income attributable to the parent company’s common shareholders per share came in at $0.31, representing an increase of 29.2% year-over-year.

Street expects CAAS’ revenue for fiscal 2023 to increase 7% year-over-year to $566.71 million. Over the past three months, the stock has gained 14.5% to close the last trading session at $3.63.

CAAS’ POWR Ratings reflect this positive outlook. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

It is ranked #4 in the China industry. It has an A grade for Value and a B for Growth, Stability, and Sentiment. Click here to see the ratings of CAAS for Momentum and Quality.

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PNGAY shares were trading at $8.75 per share on Friday afternoon, down $0.04 (-0.46%). Year-to-date, PNGAY has declined -2.99%, versus a 2.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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