Is it safe to nuzzle up to Chinese stocks now? Investors had been keeping their distance from any stocks affiliated with the region as if they had a bad case of Covid. Which isn’t really that far from the truth. While U.S.-listed Chinese stocks have been under pressure from a whole host of reasons (fears of delisting, a harsh Chinese regulatory environment and a slowing domestic economy), the stringent zero-Covid lockdown measures have been a big reason for further depressing sentiment recently.
But following an outbreak of protests that had the potential to spill over into wider civil unrest, the Chinese authorities have loosened restrictions, and this has caused a spike in Chinese stocks this week.
Most, however, are still firmly planted in negative territory for the year. That said, some Street analysts see several as primed for further gains from here. We’ve opened the TipRanks database and pulled up the details on two Chinese stocks carrying favor with the experts. Here’s the lowdown.
JD.com, Inc. (JD)
Let’s start with one of China's biggest e-commerce companies. In fact, JD sits second in the market, trailing only Alibaba. The big difference is that unlike Alibaba, JD derives the bulk of its revenue via first-party sales rather than those of third parties. Additionally, its interests are mainly confined to the e-commerce segment.
Focused on top-quality products sold at enticing prices and delivered swiftly to customers, it’s a strategy that has served the company well; revenues exhibited a 30% compound annual growth rate (CAGR) between 2016 and 2021, climbing to RMB952 billion ($149 billion), while adj. net profit increased at an even faster rate (52%), rising to RMB17.2 billion ($2.7 billion).
As has been the case for many, however, 2022 has been more of a challenge and considering the COVID-19 lockdowns and the soft economy, JD’s sales’ have taken a hit.
In the most recent quarterly report, for Q3, the company generated revenue of RMB243.5 billion ($34.2 billion), amounting to an 11% year-over-year uptick, while falling shy of the consensus estimate by $270 million.
Nevertheless, due to margin expansion, adj. operating profit expanded by 33% to RMB4.7 billion ($700 million) and helped the company post adj. EPADS of $0.88, some distance above the $0.53 anticipated by the analysts.
While aware of the risks associated with the reopening in China, Benchmark 5-star analyst Fawne Jiang is confident regrading JD’s prospects.
“Mobility improvement should work in favor of a gradual macro recovery and in turn boost consumption. We expect JD’s revenue growth to reaccelerate through FY23. In addition, structural factors that drive sustained margin improvement should help protect earnings risks despite short-term revenue uncertainties,” Jiang noted.
To this end, Jiang rates JD shares a Buy along with a $100 price target. How does this translate to investors? There’s upside potential of ~79% from current levels. (To watch Jiang’s track record, click here)
Most of Jiang’s colleagues agree; of the 13 reviews on file, 2 remain on the sidelines but all the rest are positive, making the consensus view a Strong Buy. At $77.50, the average price target suggests shares will yield returns of ~39% over the coming months. (See JD stock forecast on TipRanks)
GDS Holdings Ltd. (GDS)
Next up we have GDS, one of the biggest data center operators in China. In fact, large Chinese cloud service providers (CSPs) such as Alibaba and Tencent, as well as Chinese financial service and enterprise customers, make use of GDS's data centers. The business provides several common data center options, such as colocation, managed services, hosting, and cloud services, with the company's facilities made up of a variety of self-developed, leased, purpose-built, or converted data centers that are situated in China's most important commercial, financial, and industrial hubs. GDS is also focused on expanding beyond mainland China, and is moving into other markets, in Southeast Asia, Hong Kong and Macau.
Against a challenging macro backdrop, the company managed to post decent revenue growth in its recent Q3 report. Net revenue increased by 15% year-over-year to RMB2.37 billion ($332.8 million). However, the net loss widened from RMB301.1 million in the same period a year ago to -RMB339.7 million (-$47.7 million), while the gross profit margin contracted to 20.8% from 22.1% in 3Q21.
Such losses are anathema to investors in the current climate and are piled on top of ongoing macro headwinds. As such, GDS shares have been heavily penalized this year - down 68% even after the recent gains.
Nevertheless, Truist analyst Gregory P Miller remains in GDS’s corner and thinks the stock’s current level presents an opportunity.
“Despite continued significant delays with Chinese cloud and internet companies in consuming additional data center space, we remain confident in the potential for a recovery over the long-term for GDS Holdings as China eventually moves beyond its zero COVID policy,” the analyst wrote. “With the stock now trading at 8.6x 2024E EBITDA, a ~6.5x discount to its group average, but with a 1x higher growth rate compared to its US peers, we believe the stock is attractive for purchase. With GDS’s solid leadership position in the Chinese marketplace and continued expansion in Southeast Asia, we remain Buy rated on the name.”
That Buy rating is accompanied by a $50 price target, suggesting the shares are undervalued to the tune of a hefty 230%. (To watch Miller’s track record, click here)
Overall, GDS shares hold a Moderate Buy rating from the analyst consensus, based on 8 reviews breaking down to 5 Buys and 3 Holds. There’s plenty of upside projected; going by the $31.38 average target, the shares will deliver returns of ~106% over the coming year. (See GDS stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.