According to the World Economic Outlook, released last month, the IMF projects China’s economy will grow by 8.1% in 2021. A COVID-19 vaccine-powered re-engagement of economic  activities, a solid public investment response, and the central bank’s liquidity support are key factors that will help the Chinese economy achieve the projected  growth.

Against this backdrop, leading Chinese companies — Tencent Holdings Limited (TCEHY) and NetEase, Inc. (NTES) — have delivered strong third-quarter results, with promising year-over-year top-line growth. With strong customer bases and a focus on expanding their market reach, these two companies should continue to be strong performers this year.

Conversely,  Bilibili Inc. (BILI) and TAL Education Group (TAL) have reported negative earnings in their last reported quarter. Although their user bases have grown significantly over the years, we think their weak fundamentals and unimpressive financials will likely stop them from capitalizing on the economic growth.

Stocks to buy:

Tencent Holdings Limited (TCEHY)

Founded in 1998, TCEHY is an investment holding company that provides value-added services (VAS) and Internet advertising services in China, the U.S. , Europe, and internationally. It operates through VAS, FinTech and Business Services, Online Advertising, and an Others segment. It is also involved in the development of software and the production, investment, and distribution of films for third parties.

In December,  a Tencent-led consortium exercised its call option to acquire an additional 10% equity interest in Universal Music Group. This long-term partnership should help TCEHY to expand its opportunities and grow its user base significantly.

In November, Tencent Cloud  established Tencent Distributed Database (TDSQL), which has been deployed in the new core system of Bank Neo Commerce in Indonesia. This establishment should open more channels for TCEHY to capture new opportunities in the international market.

In the third quarter, ended September 30, 2020, TCEHY’S revenue  increased 29% year-over-year to RMB125,447 million. Its operating profit grew 34% from its  year-ago value to RMB38,116 million, while its operating margin increased to 30% from 29% last year. The company’s net profit increased 32% from the prior-year quarter to RMB 32 billion.

A consensus EPS estimate of $2.49 for 2021 represents a 28.4% improvement year-over-year. Also,  TCEHY beat the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 85.5% over the past year.

TCEHY’s POWR Ratings reflect this promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

TCEHY has a B grade for both Sentiment and Momentum. Within the China group, it is ranked #16 out of 85 stocks.

To see additional POWR Ratings for Growth, Value, Stability and Quality for TCEHY, Click here.

NetEase, Inc. (NTES)

Formerly known as NetEase.com, Inc., NTES is a leading Chinese internet and online game services provider that offers online services that focus on content, community, communication, and commerce in China, Japan and North America. It operates in three segments – Online Games Services, Youdao, and Innovative Businesses & Others.

Last month, NTES invested in IMVU Inc. to relaunch a new parent company named Together Labs to establish it as a leader and innovator in technologies that will  empower people worldwide. The initiative should help NTES become a dominant player in the online gaming and interactive entertainment sector.

In December,  NTES announced that a concert by TFBOYS, one of China’s most popular boy bands, that was held on its platform had broken the Guinness World Records for the most viewed paid concert. The achievement reflects the company’s ability to explore different approaches to engage users and simultaneously diversify its monetization channels.

NTES’ total revenue has increased 27.5% year-over-year to $2.75 billion in the third quarter ended September 30, 2020. Its online game services, which accounted for more than 74% of its total revenue, increased 20.2% year-over-year. The company’s gross profit rose 25.6% year-over-year to $1.46 billion, and its net income increased 76.4% year-over-year to $441.59 million.

A consensus EPS estimate of $4.35 for 2021 represents  a 21.8% improvement year-over-year. NTES has an impressive earnings surprise history, with the company beating consensus EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $13.56 billion for the current year represents  a 19.3% increase year-over-year. The stock has gained 79.6% over the past year.

NTES’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary ratings system. NTES has a B grade  for Growth, Stability and Sentiment. Of the 85 stocks in the same industry, it is ranked #4.

In total, we rate NTES on eight different levels. Beyond what we’ve stated above we have also given NTES grades for Momentum, Value, and Quality. Get all the NTES ratings here.

Stocks to avoid:

Bilibili Inc. (BILI)

BILI is an online entertainment services platform in China that  covers a wide range of genres and media formats, including  live broadcasting, videos, and mobile games. The company also has a partnership with Tencent Holdings Limited to  share and operate existing and additional anime and games on its platform.

Last year, the company entered  a definitive subscription agreement with Huanxi Media Group Limited. Under this agreement, BILI made an  equity investment of US$66 million in the company. BILI also has a three-year strategic partnership with Riot Games for the live broadcast of League of Legends games in China.

BILI’s total operating expenses have increased 138% year-over-year to RMB1.84 billion for the third quarter ended September 30, 2020. The company’s loss from operations rose 156% from its year-ago value to RMB1.08 billion, while its net loss increased 171.4%. Its net loss per share grew 148.4% year-over-year to RMB3.08.

A consensus EPS estimate for the next quarter, ending March 31, 2021, reflects an 80% decline year-over-year. The stock has gained 434.2% over the past year, but it is currently  trading 18% below its 52-week high of $157.66, indicating short-term bearishness.

BILI’s POWR Ratings are consistent with this bleak outlook. It has an overall rating of F, which equates to Strong Sell in our POWR Ratings system. BILI has a D grade for Value and Quality, and F for Growth. Of the 85 stocks in the same industry, it is ranked #85.

Click here to see the additional POWR Ratings for BILI (Stability, Sentiment, and Momentum).

TAL Education Group (TAL)

Based in Beijing, China, TAL offers K-12 after-school tutoring services covering various academic subjects. It also operates jzb.com, an online education platform that serves as a gateway for online courses. In addition, it provides education, investment management and consulting services.

Last December  TAL secured $3.3 billion in  private placement agreements from Silver Lake, a global leader in technology investing, and other investors. Although the transaction has not yet  closed, TAL expects the investment to enhance its position in the student community.

Although TAL’s net revenues increased 35% year-over-year to $1.12 billion in the third quarter ended on November 30, 2020, the company’s operating loss was $127.4 million compared to income from operations of $69.4 million in the same period a year ago. In fact, TAL’s non-GAAP net income declined 79% year-over-year to $10.43 million. Its non-GAAP EPS declined 79.4% from the year-ago value to $0.02 over this period.

A consensus EPS estimate of $0.16 for the quarter ending May 31, 2021 represents an 11.1% decline year-over-year. The stock has gained 51.6% over the past year.

TAL’s weak prospects are apparent in its POWR Ratings also.  The stock has an overall rating of D, equating to a Sell in our proprietary rating system. TAL also has a grade of D for Value, Growth, and Sentiment. In the same industry, the stock is ranked #65.

In addition to the POWR Ratings grades I’ve just highlighted, you can see the TAL ratings for Stability, Momentum, and Quality.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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TCEHY shares were trading at $87.93 per share on Wednesday morning, down $2.80 (-3.09%). Year-to-date, TCEHY has gained 22.31%, versus a 4.21% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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