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2 Chinese Stocks to BUY, 2 to AVOID

As the Chinese economy continues to bounce back from the coronavirus, stocks like Baidu (BIDU) and NetEase (NTES) have immense upside potential. On the other hand, Alibaba Group Holdings (BABA) and GSX Techedu (GSX) are being investigated by Chinese regulators, so these stocks may have a tough time ahead.

With the pandemic under control and consumer spending picking up, the Chinese economy remains well on track to be the only major economy to expand this year. Solid global demand for exports and the rising stock market helped the economy stabilize its recovery.

Amid this recovery, Baidu, Inc. (BIDU) and NetEase, Inc. (NTES) have reported third-quarter profits well above estimates. They have delivered top-line growth and strong cash flow, reflecting sustainability in their business. Strong fundamentals and impressive financials should help the stocks of these two companies grow in tandem with China’s economic recovery. 

However, Chinese tech giant Alibaba Group Holdings Ltd. (BABA) can lose market share with regulatory concerns surrounding its subsidiary Ant Group's IPO suspension and China's antitrust draft rule. Even GSX Techedu Inc. (GSX) has witnessed a price decline after lawsuits against the company. The revenue growth expectations for the company have been declining lately. Since these two companies might witness a decline in earnings and revenue, it is advisable to avoid them for now. 

Baidu, Inc. (BIDU) 

BIDU is a global internet service provider, operating through two segments — Baidu Core and iQIYI. The Baidu Core segment includes the Baidu App, while the iQIYI segment provides online entertainment services. 

On November 17th, BIDU announced that it will acquire JOYY’s live streaming business in China. This transaction will allow BIDU to grow its user base and boost its business growth. 

BIDU recently launched its new flagship Xiaodu Smart Display X10 and XiaoduPods smart earbuds. These affordably priced products will help the company attract a significant number of new customers. 

BIDU’s revenue increased 8% sequentially to $4.16 billion in the third quarter ended September 2020. Operating income grew 161% year-over-year to $907 million, while adjusted EBITDA rose 77% year-over-year to $1.34 billion in the third quarter. 

The consensus EPS estimate of $1.64 for the quarter ending March 2021 indicates a 30.2% improvement year-over-year. BIDU has an impressive earnings surprise history, with the company beating consensus EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $3.95 billion for the next quarter indicates a 22.4% increase from the same period last year. The stock has gained 7.6% year-to-date. 

How does BIDU stack up for the POWR Ratings

A for Trade Grade 

B for Buy & Hold Grade 

A for Peer Grade 

B for Industry Rank 

A for Overall POWR Rating. 

The stock is also ranked #17 out of 115 stocks in the China industry.

NetEase, Inc. (NTES) 

NTES is an internet technology company that offers online services related to content, community, communication, and commerce. The company operates in three segments - Online Games Services, Youdao, and Innovative Businesses and Others. 

On October 21st, NTES announced a strategic partnership with Kweichow Moutai, China's most prestigious liquor brand. Under this partnership, the brand will now be available for sale on NTES’s e-commerce platform. This will expand its service offering and attract a higher volume of customers large on NTES’s online platform.

The company has recently entered into a strategic music partnership with BMG to gain access to its extensive global music catalog. This collaboration will allow NTES to expand its portfolio to provide music from all over the globe to its growing user community. 

NTES’s revenue increased 27.5% year-over-year to $2.70 billion in the third quarter ended September 2020. Gross profit rose 25.6% from the year-ago value to $1.50 million, while cash flow from operating activities increased 13.2% sequentially to $795.47 million in the third quarter. 

The consensus EPS estimate of $1 for the quarter ending March 2021 indicates a slight improvement year-over-year. NTES has an impressive earnings surprise history, with the company beating consensus EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $3.04 billion for the next quarter indicates a 36.6% increase from the same period last year. The stock has gained 53% year-to-date. 

NTES’s promising outlook is reflected in its POWR Ratings. It is rated “Buy” with a “B” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is ranked #16 out of 115 stocks in the same industry.

Alibaba Group Holding Ltd. (BABA) 

BABA is a leading Chinese E-commerce company operating internationally in four segments — Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives and Others. Ant Group, in which BABA has a 33% stake, failed to become public lately with its IPO being suspended by regulators. Also, the company has recently been facing a class-action lawsuit that has been filed on behalf of its shareholders. 

On November 6th, BABA announced a global strategic collaboration with Richemont for accelerating the digitization of the global luxury industry and also ensuring enhanced access of the luxury brands to the Chinese market. This partnership will expand BABA’s clientele in the luxury retail industry and also leverage their expertise in retail technologies. 

On October 26th, BABA signed a Memorandum of Understanding (MoU) for a strategic partnership with BMW to implement the digitalization strategy into BMW’s full business process. This partnership will allow BABA to accelerate their digital operation and drive business growth. 

BABA’s operating income decreased 33% year-over-year to $2 billion in the third quarter ended September 2020. Adjusted EBITDA of the cloud computing segment decreased 70% from the prior-year quarter to $23 million in the third quarter. 

The consensus EPS estimate of $3.28 for the current quarter ending December 2020 indicates an 82% decline year-over-year. The consensus revenue estimate of $32.80 billion for the current quarter indicates a 61.6% growth from the same period last year. The stock has gained 30.9% year-to-date but is currently trading 13% below its 52-week high. 

GSX Techedu Inc. (GSX) 

GSX is a technology-driven education company that offers K-12 after-school tutoring services on an online platform in China. The company also provides offline business consulting courses to enhance management skills for principals and other officers of private education institutions. 

The company has recently integrated its K-12 business under their Gaotu Ketang brand to focus on delivering educational products and services with the quality of a large class and the educational results of one-on-one tutoring. This will enhance their customer experience and generate greater value for the company. 

Earlier this year, Jakubowitz Law had launched a securities fraud class-action lawsuit against GSX, on behalf of its stakeholders, which could undermine the company’s position in the Chinese market for the long run.

GSX’s revenue increased 252.9% year-over-year to RMB 1.967 billion in the third quarter ended September 2020, while interest income declined 51.8% from the year-ago value to RMB 3.30 million. 

The consensus EPS estimate for the current quarter ending December 2020 indicates a 227.3% decline year-over-year. The consensus revenue estimate of $417.06 million for the next quarter ending March 2021 indicates a 67.9% decline from the same period last year. The stock has gained 185% year-to-date but is currently trading 56% below its 52-week high. 

GSX’s POWR Ratings are consistent with this bleak outlook. It has an overall rating of “Sell” and an “F” for Trade Grade and Buy & Hold Grade with a “D” for Peer Grade and Industry Rank. It’s ranked #17 out of 31 stocks in the Outsourcing – Education Services industry.

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BABA shares were trading at $276.09 per share on Friday afternoon, down $1.63 (-0.59%). Year-to-date, BABA has gained 30.17%, versus a 14.52% rise in the benchmark S&P 500 index during the same period.



About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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