China is set to benefit from lifting stringent COVID restrictions as its economic recovery gains momentum, outpacing the broader region. Hence, it could be wise to add robust China stocks NetEase, Inc. (NTES), Yum China Holdings, Inc. (YUMC), and LexinFintech Holdings Ltd. (LX) to your watchlist. Let us discuss this in detail.
China's economy experienced a notable acceleration, surpassing expectations in the fiscal first quarter. The lifting of stringent COVID restrictions proved instrumental in revitalizing businesses and empowering consumers. The country’s first-quarter GDP grew by 4.5% year-over-year, surpassing the 2.9% growth in the previous quarter.
This exceeded analysts’ projections of a 4% increase and represented the most robust growth observed in a year. Zhiwei Zhang, chief economist at Pinpoint Asset Management, said, "Economic recovery is well on track. The bright spot is consumption, which is strengthening as household confidence improves."
Analysts polled by Reuters anticipate China's growth to accelerate this year, reaching 5.4% compared to 3.0% in the previous year. Meanwhile, the government has set a modest GDP growth target of approximately 5%. Additionally, the International Monetary Fund (IMF) expects China to expand by 5.2% this year.
The nation’s reopening and a post-pandemic recovery-driven earnings rebound are expected to propel equity markets in North Asia ahead of the broader region in 2023. The region's resilience is supported by liquidity from easing monetary and fiscal policies, coupled with successful inflation control by Asian central banks.
The Invesco Golden Dragon China ETF's (PGJ) 8.9% returns over the past six months reflect the growing interest of investors in China stocks. Given this scenario, it seems wise to add solid China stocks NTES, YUMC, and LX to your watchlist, as they are positioned for significant growth.
Let's examine the stocks' fundamentals.
NetEase, Inc. (NTES)
Headquartered in Hangzhou, China, NTES engages in online gaming, music streaming, intelligent learning services, and internet content. Its segments include Games and Related Value-Added Services; Youdao; Cloud Music; and Innovative Businesses and Others. NTES develops and operates both in-house and licensed PC and mobile games.
Yesterday, NTES announced the opening of Bad Brain Game Studios in Canada. This move would enable NTES to tap into the thriving game development industry in the country, seize lucrative opportunities in the Canadian market, and leverage the favorable business environment available.
On January 6, the company announced the acquisition of SkyBox Labs, a Canadian game studio, by its division NetEase Games. This strengthens NTES' commitment to Canada, supporting current and future partners and co-developing AAA games with leading global studios while benefiting from SkyBox's extensive game development experience.
For the fourth quarter that ended December 31, 2022, NTES’ net revenues increased 4% year-over-year to RMB 25.35 billion ($3.68 billion). Its gross profit rose 2.5% from the year-ago value to RMB 13.24 billion ($1.92 billion).
As of December 31, 2022, the company’s cash and cash equivalents stood at RMB 24.89 billion ($3.61 billion), compared to RMB 14.50 billion as of December 31, 2021. Additionally, its current assets amounted to RMB 131.60 billion ($19.08 billion), compared to RMB 113.12 billion as of December 31, 2021.
The consensus revenue estimate of $14.96 billion for the fiscal year ending December 2023 reflects a 7% year-over-year improvement. Likewise, the consensus EPS estimate of $5.03 for the current year indicates a marginal rise year-over-year. Moreover, the company surpassed the consensus EPS estimates in all four trailing quarters, which is impressive.
The stock has gained 25.7% over the past six months to close the last trading session at $83.77.
NTES’ robust fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
NTES has a B grade for Value, Sentiment, and Stability. It is ranked #5 in the 46-stock China industry.
In addition to the POWR Ratings I’ve just highlighted, you can see NTES’ ratings for Growth, Quality, and Momentum here.
Yum China Holdings, Inc. (YUMC)
YUMC, based in Shanghai, China, owns, manages, and franchises restaurants. The company operates under two segments, KFC and Pizza Hut. Its restaurant brands include KFC, Pizza Hut, Little Sheep, Huang Ji Huang, Lavazza, COFFii & JOY, Taco Bell, and East Dawning.
During the first quarter of 2023, YUMC repurchased approximately 1.0 million shares of its common stock for $62 million, with an average price of $60.30 per share. As of March 31, 2023, roughly $1.1 billion remained available for future share repurchases under the existing authorization.
This share repurchase initiative could potentially increase YUMC’s shareholder value and signal confidence in the company's financial position.
Additionally, the company’s Board of Directors declared a dividend of $0.13 per share on its ordinary stock. This dividend is payable on June 20, 2023, to shareholders of record as of the close of business on May 30, 2023.
YUMC pays a $0.52 per share dividend annually, which translates to a 0.90% yield on the current price level. Its dividend payments have grown at a 37.4% CAGR over the past five years.
For the fiscal first quarter that ended March 31, 2023, YUMC’s adjusted operating profit rose 117.1% year-over-year to $419 million. Its adjusted EBITDA grew 47.7% from the year-ago value to $539 million.
Furthermore, the company’s adjusted net income rose 186.3% from the prior year’s period to $292 million, while adjusted EPS came in at $0.69, up 187.5% year-over-year.
Analysts expect YUMC’s revenue to increase 19.2% year-over-year to $11.40 billion for the fiscal year ending December 2023. The company’s EPS for the ongoing year is expected to grow 112.9% from the prior year to $2.24. Also, the company surpassed its consensus EPS in all four trailing quarters.
Shares of YUMC have gained 37.4% over the past year to close the last trading session at $57.93.
YUMC’s positive outlook is apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
YUMC has an A grade for Sentiment and a B for Growth, Momentum, and Quality. It is ranked #4 within the China industry.
Click here to access additional YUMC ratings for Value and Stability.
LexinFintech Holdings Ltd. (LX)
Based in Shenzhen, China, LX provides online consumer finance services in the country. It operates Fenqile.com, which offers installment purchases and personal loans. Additionally, it provides location-based shopping, with buy-now and pay-later options, through the Maiya app.
During the fiscal year 2022, LX's board of directors granted authorization for two share repurchase programs on March 16, 2022, and November 17, 2022, allowing the company to buy back its shares/ADSs worth up to $70 million over the next twelve months.
To date, LX has repurchased approximately 22 million ADSs for around $48 million under these programs. The share repurchase initiative could potentially boost LX’s shareholder value, optimize capital structure, and signal confidence in the company's prospects.
Furthermore, reflecting positive market conditions, the company anticipates significant growth in total loan originations for the second quarter of 2023, with expected figures ranging from RMB 63 billion ($8.95 billion) to RMB 63.5 billion ($9.02 billion), marking a substantial year-over-year increase of 28-29%.
During the fiscal first quarter that ended March 31, 2023, LX’s operating revenues increased 74.2% year-over-year to RMB 2.98 billion ($434.34 million). Its non-GAAP EBIT grew 180.4% from the year-ago value to RMB 438.37 million ($63.83 million).
Additionally, adjusted net income attributable to ordinary shareholders of the company increased 190.2% from the prior year’s period to RMB 375.06 million ($54.61 million), while adjusted net income per ordinary share attributable to ordinary shareholders of LX came in at RMB 1.00 ($0.15), up 222.6% year-over-year.
The consensus revenue estimate of $1.79 billion for the fiscal year ending December 2023 reflects a 24.3% year-over-year improvement. The consensus EPS estimate of $1.24 for the current year indicates a 58% rise from the prior year. Over the past six months, the stock has gained 47.8% to close the last trading session at $2.38.
LX’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
LX has an A grade for Value and Sentiment. It has ranked #7 within the same industry.
Click here to access additional LX ratings (Growth, Quality, Stability, and Momentum).
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NTES shares were trading at $82.80 per share on Wednesday afternoon, down $0.97 (-1.16%). Year-to-date, NTES has gained 14.37%, versus a 7.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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