While the rest of the world is still struggling to recover from pandemic-driven public health travails and economic damage, China has been quite successful on both those fronts. As the first major economy to recover from the pandemic, China has been witnessing a rise in its GDP. And, unlike the U.S., China’s economy and the stock markets are in sync. The bull run by Chinese growth stocks should last well into 2021 backed by above-average economic growth and a potentially favorable trade environment with a Joe Biden Administration.
The world’s second largest economy is on a strong footing with industrial production and retail sales increasing 7% and 5%, respectively, in November from a year earlier. Investors’ confidence in Chinese stocks can be seen in Invesco Golden Dragon China ETF’s (PGJ) 15.3% gains over the past month, as compared to SPDR S&P 500 ETF Trust’s (SPY) 3.4% returns.
Goldman Sachs expects China to witness one of the strongest and fastest macro recoveries in 2021 among major economies. Because Chinese tech giants are currently facing regulatory investigations, relatively smaller companies are well-positioned to grab market share. Companies like Vipshop Holdings Limited (VIPS), 21Vianet Group, Inc. (VNET), and Origin Agritech Limited (SEED) we think are strategically positioned to capitalize on these developments.
Vipshop Holdings Limited (VIPS)
VIPS is a leading Chinese online discount retailer of a variety of brands. It operates through four segments: Vip.com, Shan Shan Outlets, Internet Finance, and Others. The company provides apparel, home appliances, furnishings and decor, toys and games, and cosmetics through online platforms such as vip.com and vipshop.com. In addition, VIPS offers services in warehousing, logistics, research and development, technology development, and consulting.
On November 2, VIPS announced the appointment of Pengjun Lu as Co-Chief Technology Officer . His extensive experience in big data and personalization in China’s internet industry should enable the company to improve customer experience on VIPS’ platform.
VIPS’ revenue has grown 18.2% year-over year to RMB23.20 billion in the third quarter ended September 30, 2020. Net income has risen 42.1% from the prior-year quarter to RMB1.20 billion, while gross profit rose 15.3% from the year-ago value to RMB38.30 billion. The number of active VIPS customers increased 36% year-over-year to 43.40 million over this period.
The company’s revenue grew at a CAGR of 12.1% over the past three years, while net income grew at a CAGR of 34% over this period. VIPS’s EPS grew at a CAGR of 29.2% over the past three years. This reflects the company’s robust growth potential over the past few years.
A consensus EPS estimate of $0.34 for the current quarter, ending March 31, 2021, represents a 61.9% improvement year-over-year. VIPS has an impressive earnings surprise history as well; it beat the Street’s EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $3.94 billion for the current quarter represents a 47% improvement from the same period last year. The stock has gained 97% over the past year.
How does VIPS stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
A for Overall POWR Rating.
The stock is also ranked #8 of 103 stocks in the China industry.
21Vianet Group, Inc. (VNET)
Founded in 1999, VNET is a Chinese carrier and cloud-neutral Internet data center services provider. It operates in two segments – Hosting and Related Services, and Managed Network Services. The company offers its services to internet companies, government entities, blue-chip enterprises, and small- to mid-sized enterprises. In addition, the company provides hosting and related services to house servers and networking equipment in its data centers.
In late October, VNET announced that its Board of Directors had approved several promotions to strengthen its senior leadership team to further assure VNET’s growth. The executive changes should continue to elevate the company’s technical capabilities and integration of its business groups.
Earlier last year, VNET announced the exercise of underwriters’ options to purchase an additional 2.55 million VNET American depositary shares at $20.75. The company raised a total of approximately $390.50 million from the public offering, 80% of which it expects to use in the expansion of data center infrastructure by organic growth and strategic acquisitions.
VNET’s revenue has increased 27% year-over-year to RMB1.25 billion in the third quarter ended September 30, 2020. Its gross profit has increased 23.6% from the year-ago value to RMB275.10 million, while its adjusted EBITDA rose 35.2% year-over-year to RMB 368.50 million. The company reported a net profit of RMB 97.1 million, compared to a net loss of RMB69.50 million in the same period of 2019.
The company’s revenue has grown at a CAGR of 8.7% over the past three years, while EBITDA grew at a CAGR of 58.2% over this period. VNET’s tangible book value grew at a CAGR of 18.7% over the past three years. This growth momentum should continue into 2021 as the demand for cloud computing networks rises.
The consensus EPS estimate for the quarter ending March 31, 2021 represents an 81.2% improvement year-over-year. The consensus revenue estimate of $963.29 million for 2021 represents a 29.9% gain from the same period last year. The stock has gained 333.1% over the past year.
VNET’s strong fundamentals are reflected in its POWR Ratings. It has a “Strong Buy” rating with an “A” for Trade Grade, Buy and Hold Grade, and Peer Grade. It is ranked #7 of 81 stocks in the Technology – Services industry.
Origin Agritech Limited (SEED)
Based in the People’s Republic of China, SEED operates as an agricultural biotechnology and an e-commerce platform. The company is involved in crop seed breeding and genetic improvement activities. Its e-commerce platform delivers agricultural products comprising agricultural seed products, other agricultural inputs, foods, household products, and other consumer products to farmers through online and mobile ordering.
Last December, SEED updated shareholders on recent developments out of China regarding the path to GMO (genetically modified organisms) commercialization in the country. The company also provided details on the status of the approval process for its different seed traits. The company is well positioned to capitalize on this multi-billion-dollar market opportunity as it prepares for the commercialization of GMO seeds in China.
In October , SEED announced that its Beijing Origin subsidiary had received an additional RMB20 million in funding from its joint venture partner, Beijing Changping Technology Innodevelop Group. This should help SEED to expand its seed production and marketing in anticipation of China going GMO positive in the near-term.
The company generated a trailing-twelve-month total revenue of ¥54.33 million and interest income of ¥7,000 over this period. SEED’s EBITDA has grown 1614.2% year-over-year. Also, the stock has gained 66.1% over the past year.
It is no surprise that SEED is rated “Strong Buy” in our POWR Ratings system. It has an “A” for Trade Grade, Peer Grade, and Industry Rank, and a “B” for Buy & Hold Grade. Among the 36 stocks in the Agriculture industry, it is ranked #14.
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VIPS shares were trading at $28.56 per share on Wednesday morning, down $0.79 (-2.69%). Year-to-date, VIPS has gained 1.60%, versus a 1.32% 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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