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5 Top-Ranked China Stocks to Buy as Growth Surges in Q1

Swarup Gupta

In what comes as welcome news to an economy in transition, China’s GDP has increased for a second consecutive quarter. The pickup in growth experienced during the first quarter of the year was largely attributable to an increase in industrial production, credit growth and a booming real estate sector.

With consumption contributing more strongly toward growth, there are indications that China’s economic transformation is progressing well. At the same time, there is enough momentum behind investment to ensure a fast pace of growth in the second quarter of 2017. With good times ahead for the economy, picking up Chinese stocks like a smart option for investors.

GDP Rises, Indicators Pick Up

In the first quarter, China’s GDP increased by 6.9% on an annual basis. This was the strongest pace of growth witnessed in 18 months and has exceeded most estimates. Further, it remains well above the 6.5% pace for 2017 predicted by Premier Li Keqiang. Growth picked up pace toward the end of the first quarter, indicating that this momentum is likely to be carried forward into the second quarter of the year.

A series of bullish economic indicators was released along with the GDP reading, all of which depicted a robust economy. During the first quarter, industrial production increased by 6.8% even as year-over-year growth for March came in at 7.6%. Retail sales increased at an annual rate of 10.9% last month.

Additionally, fixed asset investment increased by 9.2% during the first quarter, significantly higher than the pace of 8.1% experienced last year. Meanwhile, real estate investment increased by 9.1% during the same period. In March, new home sales surged by 18% on a yearly basis, illustrating frenzied activity in China’s housing sector.

Consumption Strengthens, Investment Momentum Intact

Currently, China seems to be progressing steadily towards its goal of becoming a consumption driven economy. This was borne out by the fact that consumption’s contribution to growth in the first quarter has increased from last year’s level of 64.6% to 77.2%.

A substantial increase in retail sales is further evidence of the growing importance of consumer spending in an economy traditionally driven by industrial production. A fall in the unemployment rate and a concurrent increase in the number of job additions during the first quarter indicate that such trends are likely to be sustained in the months to come.

Meanwhile, investment momentum is likely to remain strong in the near future, further brightening the economic outlook. On Apr 1, the government announced plans to set up the Xiongan New Area, a new special economic zone which would entail an investment of around $290 billion.

This is a clear sign that China will continue to depend of high levels of investment in real estate to power growth. The only downside to this trend is the spate of restrictions on property purchases which have recently come into effect across several major cities. However, this may serve to cool down the overheated property market to more sustainable levels, a major positive for the economy over the long run.

Our Choices

Strong GDP data in the first quarter indicates that Chinas’ economy is on a firm footing at present. Such a view is backed up data on all the other major economic indicators released last month.

Additionally, there is enough evidence to suggest that this momentum will be carried forward into the second quarter. Adding stocks from China to your portfolios looks like a prudent option at this point. 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, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM score. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sinopec Shanghai Petrochemical Company Ltd. SHI is a China's largest petrochemical company. The company processes crude oil into synthetic fibers, resins and plastics, intermediate petrochemicals and petroleum products.

Sinopec has a VGM Score of A. The company has expected earnings growth of 60.8% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.37, lower than the industry average of 16.11.  The stock has returned 8.4% year-to-date, outperforming the Zacks Chemical - Diversified sector, which has gained 5.2% over the same period.

Changyou.com Ltd. CYOU is a developer and operator of online games in China.

Changyou.com has a VGM Score of A. The company has expected earnings growth of 6.8% for the current year. It has a P/E (F1) of 9.41x, lower than the industry average of 16.19. The stock has returned 28.9% year-to-date, outperforming the Zacks Internet - Content sector, which has gained 8.5% over the same period.

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

YY Inc. has a VGM Score of B. The company has expected earnings growth of 11.6% for the current year. It has a P/E (F1) of 10.38x, lower than the industry average of 16.19. The stock has returned 11.6% year-to-date, outperforming the Zacks Internet - Content sector, which has returned 8.5% over the same period.

Yintech Investment Holdings Ltd. YIN is an online provider of spot commodity trading services primarily in China.

Yintech Investment Holdings has a VGM Score of B. The company has expected earnings growth of 25.4% for the current year. It has a P/E (F1) of 7.42x, lower than the industry average of 15.61. The stock has returned 18.5% year-to-date, outperforming the Zacks Financial - Investment Bank sector, which has lost 7.6% over the same period.

China Petroleum & Chemical Corp. SNP is the second largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products in China.

Sinopec has a VGM Score of B. The company has expected earnings growth of 56.2% for the current year. Its earnings estimate for the current year has improved by 20.4% over the last 30 days. The stock has returned 15% year-to-date, outperforming the Zacks Oil And Gas - Integrated - Emerging Markets sector, which has returned 2.4% over the same period.

Sell These Stocks. Now.

Just released, today's 220 Zacks Rank #5 Strong Sells demand urgent attention. If any are lurking in your portfolio or Watch List, they should be removed immediately. These sinister companies because many appear to be sound investments. However, from 1988 through 2016, stocks from our Strong Sell list have actually performed 6X worse than the S&P 500. 

See today's Zacks "Strong Sells" absolutely free >>.

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Changyou.com Limited (CYOU): Free Stock Analysis Report
YY Inc. (YY): Free Stock Analysis Report
China Petroleum & Chemical Corporation (SNP): Free Stock Analysis Report
SINOPEC Shangai Petrochemical Company, Ltd. (SHI): Free Stock Analysis Report
Yintech Investment Holdings Limited (YIN): Free Stock Analysis Report
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