With the world’s second-largest economy again entering a prosperous growth phase, its outlook gleams with promise. Hence, it could be wise to invest in strong China stocks Sunlands Technology Group (STG) and Tarena International, Inc. (TEDU), which are poised for solid returns. Let us discuss this in detail.

China’s economic growth hit a decades-low level in 2022, with a meager 3% increase in its Gross Domestic Product (GDP), marking the second-slowest growth rate since 1976. However, the lifting of stringent COVID-19 lockdowns has led to gradual stabilization and improvement in the world’s second-largest economy.

The nation’s long-term outlook appears optimistic. The International Monetary Fund (IMF) has raised its forecast for the Asia-Pacific region, attributing its growth primarily to China’s recovery and India’s resilient economic expansion. The organization raised its growth projection for China to 5.2%.

According to Standard Chartered Chairman José Viñals, China’s economy is expected to be “on fire” in the second half of the year. Goldman Sachs (GS) projects a potential 24% increase in the MSCI China index as the country transitions from the reopening phase, which followed strict zero-Covid policies, to a period of economic growth.

Abigail Yoder, U.S. equity strategist at J.P. Morgan Private Bank, has expressed optimism regarding Chinese equities. She anticipates that returns are more likely to be driven by corporate earnings rather than valuations. She pointed out that many companies in China have successfully safeguarded their profit margins through cost-cutting measures.

The Invesco Golden Dragon China ETF’s (PGJ) 7.7% returns over the past six months demonstrate investors’ interest in China stocks. Against this backdrop, it could be wise to capitalize on the thriving potential of China stocks STG and TEDU, which are primed for growth.

Let’s discuss them in detail.

Sunlands Technology Group (STG)

STG, headquartered in Beijing, China, provides various degree and diploma-oriented post-secondary courses. It offers education services to adult students pursuing post-secondary and professional education through online and mobile platforms.

In terms of trailing-12-month P/E, STG is trading at 0.75x, 95.2% lower than the 15.57x industry average. The stock’s trailing-12-month EV/Sales of 0.08x is 93.1% lower than the industry average of 1.10x, and its trailing-12-month EV/EBITDA of 0.27x compares with the 10.12x industry average.

During the fourth quarter that ended December 31, 2022, STG’s non-GAAP income from operations rose 68.2% year-over-year to RMB167.32 million ($23.86 million), while non-GAAP EBITDA grew 41.9% from the year-ago value to RMB198.22 million ($28.27 million).

In addition, non-GAAP net income attributable to STG increased 17% year-over-year to RMB180.62 million ($25.76 million), and non-GAAP EPS came in at RMB26.03, up 13.4% from the prior year’s period.

Over the past six months, the stock has gained 28.5% to close the last trading session at $5.14.

STG’s strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

STG has an A grade for Value and B for Quality and Sentiment. It is ranked #2 in the 95-stock China industry.

In addition to the POWR Ratings I’ve just highlighted, you can see STG’s ratings for Stability, Growth, and Momentum here.

Tarena International, Inc. (TEDU)

TEDU, based in Beijing, China, delivers professional education services through full-time and part-time classes. The company provides courses in IT and non-IT subjects, along with live distance instruction, classroom-based tutoring, and online learning modules.

On February 27, TEDU announced that it had become an approved ecosystem partner of Baidu, Inc.’s (BIDU) generative AI chatbot, ERNIE Bot. The partnership grants TEDU priority access to explore ERNIE Bot’s applications in professional education, making it the first use of the conversational language model in this field.

The strategic partnership opens up opportunities for TEDU to enhance its educational offerings and potentially attract more students, leading to increased revenue and profitability.

In terms of trailing-12-month P/E, TEDU is trading at 3.04x, 80.1% lower than the 15.57x industry average, while its trailing-12-month EV/Sales of 0.12x is 89.5% lower than the 1.10x industry average. Also, the stock’s trailing-12-month EV/EBIT of 3.08x compares with the 13.89x industry average.

For the fiscal fourth that ended December 31, 2022, TEDU’s gross profit margin grew 8.4% year-over-year to 58.4%. Its non-GAAP operating income came in at RMB233 thousand ($34 thousand) compared to a loss of RMB56.45 million in the prior year’s quarter.

Moreover, as of December 31, 2022, the company’s total current assets stood at RMB667.55 million ($96.79 million), compared to RMB619.33 million as of December 31, 2021.

Analysts expect TEDU’s revenue to increase 15.2% year-over-year to $391.95 million for the fiscal year ending December 2024. The company’s EPS for the same year is expected to rise 138.2% year-over-year to $2.76 billion. Shares of TEDU have gained 12.9% over the past year to close the last trading session at $3.20.

TEDU’s robust fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

TEDU has an A grade for Growth and a B for Value and Quality. It has topped the China industry.

Click here to access additional TEDU ratings for Stability, Sentiment, and Momentum.   

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STG shares were trading at $4.98 per share on Thursday afternoon, down $0.16 (-3.11%). Year-to-date, STG has declined -31.69%, versus a 9.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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