China eased back on its harsh COVID restrictions, the lockdowns and the travel quarantines, and that nation’s stock markets jumped, rising some 40% from their recent low points. The bullish sentiment in the world’s largest country – and second largest economy – was infectious, and the MSCI Asia Pacific Index is up some 20% from its October low. In fact, the Asian benchmark has outperformed the S&P 500 in the first week of 2023.
What this means, at the bottom line, is that Chinese stocks are looking better and better to investors. In the words of Hou Wey Fook, chief investment officer from Singapore’s DBS, “the risk-reward for China’s stocks looks enticingly attractive at this stage.”
Getting into greater detail, Hou further explains, “[We] are convinced that the market bottom of October 2022 is in place… On catalysts, we are now seeing a full-fledged reopening of the economy, as well as the government’s proactive support measures for its property sector.”
So let’s go take a look at two major Chinese stocks. These are definitely companies you’ve heard of – they’ve both had plenty of headlines in recent years. According to the TipRanks data, both are Buy-rated, with double-digit upside potential for the coming year. Let’s dip into the details, along with recent comments from the Street’s analysts.
We’ll start in China’s electric vehicle sector, and look at one of the leading companies, Nio. Nio has the advantage of having been an ‘early adopter’ in the sector, and has been delivering production-line vehicles since 2018. The company currently has a lineup of 6 EVs available in China’s consumer market, in SUV, sedan, and coupe designs. Nio hasn’t put all of its eggs in the vehicle basket, however; the firm also introduced Battery-as-a-Service to the Chinese electric vehicle market, giving customers and drivers a faster, less expensive mode for swapping out battery packs when the car needs recharging.
Nio has had some conflicting data releases recently, starting with a solid 3Q22 earnings release in November – and then a disappointing delivery update for December.
On earnings, the company showed revenues of $1.83 billion in Q3, for a 24% quarter-over-quarter gain, and a larger 38% year-over-year gain. The company delivered 31,607 vehicles in the third quarter, for a 29% y/y increase.
More recently, however, the delivery numbers have stumbled. In the last delivery update, reported on January 1, Nio showed a total of 15,815 December deliveries, capping a Q4 total of 40,052. While these numbers kept up the company’s positive trend – the December deliveries were up more than 50% y/y, and the Q4 deliveries up more than 60% – they both missed the forecasts, which had called for 20,000 deliveries in December, and between 43,000 and 48,000 for the quarter.
The miss in deliveries can be chalked up to a series of headwinds that piled up as 2022 ended, and which can be summed up as ‘supply chain difficulties.’ Nio has had issues with its supply of metal casting parts and silicon carbide, and with setting up its EDS assembly – and even with delivery logistics on completed vehicles. Nevertheless, the company did record a 34% y/y delivery increase for all of 2022, with 122,486 vehicles delivered. As of December 31, 2022, the company has delivered a cumulative total of 289,556 EVs.
Analyst Edison Yu, in his coverage of NIO shares for Deutsche Bank, notes the problems that Nio has had, but goes on to say, “We anticipate all outstanding operational bottlenecks will be addressed by the end of the first quarter. NIO has already qualified additional casting suppliers, eliminating capacity constraints for the ET7. An additional EDS assembly line has been added, supporting ET5 volumes and the silicon carbide supply issue related to Onsemi should be resolved this month.”
Looking ahead toward Nio’s meeting its challenges, Yu rates the shares as a Buy – and his $21 price target implies a one-year upside gain of 95%. (To watch Yu’s track record, click here)
Overall, this Chinese EV maker has gotten reviews from 13 Wall Street analysts – and their views include 9 Buys and 4 Holds for a Moderate Buy consensus rating. The stock is selling for $10.76 and its $16.14 average price target suggests a gain of 50% over the next 12 months. (See NIO stock forecast on TipRanks)
Now let’s switch to China’s e-commerce sector, and Alibaba. While this company focuses mainly on Chinese online retail, where overall online penetration rates are lower than in the West, China’s larger population means that Alibaba can rely on a domestic customer base close to 800 million strong, more than all of Europe.
Alibaba’s strong domestic customer base, and its ability to delivery virtually any product to any buyer in China, gives the company a solid foundation to stand on – and as a result, earnings have been rising for several quarters now. The company reported a top line of US$29.12 billion in the last reported quarter (fiscal 2Q23, corresponding to calendar 3Q22), for a modest 3% y/y gain. Income from operations, at US$3.5 billion, showed a far stronger jump, of 68% y/y, and the non-GAAP diluted EPS of US$1.82 per American Depositary Share was up 15% from the year-ago period, and 7% above the forecast $1.70.
All in all, investors were happy with what they saw and BABA shares have gained approximately 40% since the earnings release.
Morgan Stanley’s Gary Yu takes an aggressively bullish stance on Alibaba, stating flatly, “We believe the share price will rise in absolute terms over the next 60 days.”
Putting some meat on those bones, Yu adds, “We see 1) an inflection in customer management revenue (CMR) on the back of consumption recovery in China, and 2) reacceleration in cloud revenue driven by non-internet industries, fueling high-quality earnings growth…. We also believe BABA will outperform other China Internet stocks during the current easing regulatory environment…. We view BABA as a key beneficiary of China’s reopening and a proxy for inflows to China from global investors.”
These are strong opinions, and they back up Yu’s Buy rating on BABA shares, while his $150 price target points toward a 35% gain by the end of 2023. (To watch Yu’s track record, click here)
The Morgan Stanley view is highly bullish here – but the 14 other analyst reviews on BABA are also bullish, for a unanimously positive Strong Buy consensus rating. With a current trading price of $110.83 and an average price target of $138.67, Alibaba’s stock claims a 25% upside potential on the one-year time horizon. (See Alibaba stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.