After a 3-year slump, first signs of a rally appear for China's stocks but which ones stand to gain the most from a revival?
China’s stock market seems to be at a turning point. The MSCI China index, covering around 85% of China’s equities, was down 11% in 2023. Since 2020’s peak of 29% annual returns, MSCI China was down 21.64% in 2021 and 21.80% in 2022.
This translates to a market capital drain of nearly $2 trillion as global investors exited the market. Year-to-date, the CSI 300 index, tracking China’s top 300 companies, is down 2.2%, indicating another negative year.
Over the week, however, the blue-chip CSI 300 went up 3%, the biggest rally since March 2022. Following the nation’s sovereign wealth fund (Central Huijin Investment) ETF purchasing spree to halt the three-year market rout, the China Securities Regulatory Commission delivered.
The Commission is scheduled to update President Xi Jinping by this Tuesday, potentially delivering more market-boosting measures. In the meantime, small-cap equities, expressed via the CSI 1000 index, went up 8%.
Will this mark a new beginning after the $7 trillion wipeout from Hong Kong and China equities since early 2021? That is mainly dependent on central planners. JPMorgan forecasts a 66-point bump for the MSCI China index by the end of 2024, translating to a market rise of over 30% since Friday.
For US investors, accessible as American Depositary Receipt (ADR) or ADS, which China-based stocks should be on the watch list?
1. Tencent Holdings
Over one year, {{0|Tencent} } is down nearly 22% but rallied 7% over the week. In addition to having stakes across Snap, Activision Blizzard (NASDAQ:ATVI), Tesla (NASDAQ:TSLA), Epic Games, and others, Tencent is also diversified across China’s logistics giants such as JD (NASDAQ:JD).com and leading game-focused live streaming platform DouYu.
In effect, Tencent’s diversification across social media, e-commerce, online advertising, and gaming is a benchmark of its own. In Tencent’s latest earnings released in November, for Q3 2023, the company increased its year-over-year revenue by 10%, while its operating profit of $7.7 billion increased by 36% YoY.
By the end of the quarter, Tencent reported $54 billion in total cash. With an 85% YoY growth in free cash flow of $7.2 billion, the company has ample space for expansion and reinvestments. Tencent’s Mini Games and Video Accounts services boosted high-margin revenue streams while also increasing AI investments.
Per Nasdaq data, the average TCEHY (OTC:TCEHY) price target is $49.55 vs. the current $37. The high estimate is $61.1, while the low forecast is above the current price at $41.5 per ADR.
2. PDD Holdings
Similar to Meta (NASDAQ:META), Pinduoduo (NASDAQ:PDD) is China’s social media and advertising giant and an e-commerce platform that charges merchant fees on sales, marketing, and transactions.
Over a one-year period, PDD is up 34% but down 13% year-to-date. In the latest Q3 2023 earnings released in November, PDD Holdings reported 94% total revenue increase of $9.4 billion from a year-ago quarter.
The largest revenue increase came from transaction services, up 315%, while sales and marketing grew by 55% at $2.9 billion. PDD’s cash and cash equivalents increased 36% to $27.8 billion as of September 30, 2023.
Per Nasdaq data, the average PDD price target is $176.04 vs. the current $125. The high estimate is $226, while the low forecast is $117 per American Depositary Share (ADS).
3. Baidu
Equivalent to Alphabet (NASDAQ:GOOG), Baidu (NASDAQ:BIDU) is China’s leading search engine. In addition to online marketing services and AI integration, Baidu provides non-marketing value-added services such as cloud computing. With a focus on local content via an online-to-offline (O2O) approach, Baidu even expanded into autonomous driving tech.
Over one year, BIDU is down 25%, gaining 2.45% over the week. In the latest Q3 2023 earnings delivered in November, Baidu’s total revenue is up 6% year-over-year to $4.7 billion, while its operating income is up 18%.
Notably, Baidu’s take on intelligent driving is expanding rapidly. As an autonomous ride-hailing service, Apollo Go increased rides by 73% YoY. Cumulatively, Apollo Go reached 4.1 million rides. Compared to Q2, Baidu’s free cash flow decreased from $1.09 billion to $822 million.
The company is expected to report Q4 2023 on February 6. Per Nasdaq data, the average BIDU price target is $164.39 vs. the current $106. The high estimate is $215, while the low forecast is $120 per ADS.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
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