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5 China Stocks for Profits in Second Half of 2017

Swarup Gupta

On Jun 5, China’s central bank said that both China’s economy and its financial markets were reflecting a sufficient degree of stability. The People’s Bank of China did not downplay the challenges facing the economy altogether, and continued to emphasize on the need to reduce systemic risk. But its confidence in the economy was in keeping with those of independent analysts and market watchers.

It is now widely believed that China’s economy will experience a marginal deceleration in the months ahead. However, most economists think that growth will remain largely steady. Additionally, the slight slowdown is largely attributable to institutional measures taken to combat surging debt levels and an overheated housing market. Given that China is likely to remain one of the world’s fastest growing economies, it makes good sense to invest in stocks from the country at this point.

Manufacturing, Services Strengthened in June

The world’s second largest economy ended the first half of the year on a strong note, depicting strength across services and manufacturing. Data from China’s National Bureau of Statistics (NBS) showed that the country’s manufacturing PMI increased from the level of 51.2 achieved in May to 51.7 in June.

The highest reading since March was achieved during a period when the metric was widely expected to decline. According to the NBS, new export orders, production and new orders increased at a more rapid pace compared to May. Meanwhile, prices of inputs moved lower for a third successive month.

Additionally, China’s non-manufacturing PMI increased from 54.5 in May to 54.9 in June. This is the second best level achieved since May 2014. The PMI for the services sector increased by 0.3 points to 53.8 while the construction PMI gained one point to hit 61.4.

Economy Stable, Says China’s Central Bank

Meanwhile, on Monday, the People’s Bank of China stated that China’s financial markets and economy continue to enjoy a significant level of stability. However, the central bank continued to characterize the external environment as “complex” and emphasized the need for reducing systemic risk. In another report released on Tuesday, the central bank reiterated the need to reduce systemic risks, widely believed to lead to a marginal slowdown for the economy in the quarters ahead.

China’s regulators are taking a series of measures to reduce the country’s burgeoning debt levels and cool down its overheated property markets. Besides curbs on home buying, authorities have cracked down on shadow financing practices, which will likely raised debt levels on the books of banks. According to Reuters, the quantum of China’s shadow financing nosedived to 28.9 billion yuan in May after coming in at 177 billion yuan in April.

But despite efforts being taken to deleverage the economy, most economists believe that growth and industrial output will continue to be stable. According to a Reuters poll, industrial output is likely to increase by 6.5% in June, in line with May’s increase.

And though growth is expected to moderate from the first quarter pace of 6.9%, estimates for this key metric have been rising recently. A recent survey from Bloomberg estimates that GDP will come in around 6.8% during the second quarter. Meanwhile, Australia & New Zealand Banking Group increased its estimate for the full year from 6.5% to 6.7% on Jul 4.

Our Choices

Despite the number of challenges facing the economy at present, China’s central bank thinks the country’s economy and financial markets continue to be stable. Such sentiments are being echoed by independent commentators even as June’s official data was upbeat overall.

Adding China stocks from your portfolio looks like a prudent option at this time. However, picking winning stocks may be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Yirendai Ltd. YRD is the operator of an online consumer finance portal in China.

Yirendai has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of 12.2% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.54, lower than the industry average of 16.55. The stock has returned 25% year to date, outperforming the Zacks Internet - Services Market sector, which has gained 13.5% over the same period.

JD.com, Inc. JD operates as an online direct sales company in China.

JD.com has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. The stock has returned 56.3% year to date, outperforming the Zacks Internet – Commerce sector, which has gained 38.6% over the same period.

YY Inc. YY is a communication social platform, which engages users in online group activities through voice, text and video.

YY Inc. has a VGM Score of A. The company has expected earnings growth of 35.5% for the current year. The stock has a P/E (F1) of 11.05x, lower than the industry average of 23.94. The stock has returned 44% year to date, outperforming the Zacks Internet - Content Market sector, which has gained 28.3% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Tarena International, Inc. TEDU is a provider of professional education services in China.

Tarena International has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 35.4% for the current year. The stock has returned 19.7% year to date, outperforming the Zacks Staffing Firms Market sector, which has gained 10.9% over the same period.

Yum China Holdings, Inc. YUMC is a licensee of Yum! Brands primarily in mainland China.

Yum China Holdings has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 13.3% for the current year. Its earnings estimate for the current year has improved by 0.9% over the last 30 days. The stock has returned 53.7% year to date, outperforming the Zacks Retail - Restaurants Market sector, which has gained 10.3% over the same period.

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