China’s rapid growth in the year's first half has raised the region’s prospects. In light of this, we suggest you take a look at three ‘Strong Buy’ Chinese stocks, namely, X Financial (XYF), China Automotive Systems, Inc. (CAAS), and Sunlands Technology Group (STG).
The growing tension between Beijing and Washington, including the United States curbing the sale of certain technologies to China, has negatively impacted sentiments about the Chinese economy equities. Amid deteriorating economic ties, investors are questioning Chinese assets' attractiveness, which could lead to a deep selloff.
However, this has presented unique opportunities for high-risk tolerant investors as valuations have significantly declined. Chinese equities have grown more enticing than U.S. equities, with significant upside potential.
Despite being marred by the zero-COVID policy and fears of a global recession, the Chinese economy has demonstrated resilience and remained stable, as evident from the iShares MSCI China ETF (MCHI) 14.6% returns over the past nine months. In the second quarter of 2023, its Gross Domestic Product (GDP) grew by 6.3% year-over-year, marking a marginal pace of growth from the first quarter.
On the bright side, the World Bank has raised its forecast for China's growth to 5.6% from 4.3%. Earlier in April, the International Monetary Fund (IMF) had also raised its forecast for China’s GDP to 5.2%, up from 4.4%. The positive economic outlook should continue strengthening sentiments on the highly battered Chinese equities.
Furthermore, ahead of a big Politburo meeting, the country has announced multiple measures to boost its economic scenario. Authorities have announced a series of pledges to reassure private and foreign investors of a more favorable investment environment.
Given this backdrop, investors could invest in quality stocks XYF, CAAS, and STG. Given their solid fundamentals, these stocks have earned an overall A (Strong Buy) rating in our proprietary POWR Ratings System.
X Financial (XYF)
XYF is an online personal finance company based in Shenzhen, the People’s Republic of China. Its loan products include the Xiaoying credit loan, which consists of the Xiaoying card loan, and Xiaoying preferred loan to small business owners, Xiaoying revolving loan.
In terms of trailing-12-month EV/Sales, XYF is trading at 0.28x, 90.8% lower than the industry average of 3.09x. Its trailing-12-month EV/EBITDA and EV/EBIT multiples of 0.98 and 0.99 are 92.5% and 92.7% lower than the industry averages of 13.15x and 13.57x, respectively.
XYF’s total loan amount facilitated increased 57.9% year-over-year to RMB24.09 billion ($3.35 billion) for the fiscal first quarter that ended March 31, 2023. Its total number of active borrowers grew 71.4% from the year-ago value to 1,523,738.
Also, the company’s total revenue increased 13.1% from the prior-year quarter to RMB1 billion ($139.78 million). The company’s non-GAAP adjusted net income came in at RMB306.53 million ($42.64 million) and RMB6.24 per share, representing 99.2% and 131.1% year-over-year improvements.
XYF’s net income and EBITDA have increased at CAGRs of 37.4% and 33.2%, respectively, over the past three years, while its EPS has grown at a 38.7% CAGR.
The stock’s trailing-12-month EBIT margin and ROCE of 28.77% and 20.86% are 40.8% and 84.8% higher than the 20.44% and 11.28% industry averages, respectively. Its trailing-12-month ROTA of 10.25% compares with the industry average of 1.12%.
Over the past nine months, the stock has surged 123.9% to close the last trading session at $4.41.
XYF’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It also has an A grade for Value and a B for Growth and Sentiment. Out of the 45 stocks in the B-rated China industry, it is ranked #4. To see the other ratings of XYF for Momentum, Stability, and Quality, click here.
China Automotive Systems, Inc. (CAAS)
Headquartered in Jingzhou, China, CAAS is a leading supplier of power steering components and systems to the Chinese automotive industry, operating through eight Sino-foreign joint ventures. It offers a full range of steering system parts for passenger automobiles and commercial vehicles.
In terms of trailing-12-month EV/Sales, CAAS is trading at 0.22x, 81.5% lower than the industry average of 1.19x. The stock’s trailing-12-month EV/EBITDA of 2.87x is 73.6% lower than the 10.88x industry average. Furthermore, the stock’s trailing-12-month EV/EBIT of 6.83x is 53.8% lower than the 14.79x industry average.
In the fiscal first quarter that ended March 31, 2023, CAAS’ net sales increased 4.3% year-over-year to $142.24 million, while its gross profit grew 46.9% from the year-ago value to $21.62 million. The company’s income from operations amounted to $7.74 million compared to a loss from operations of $1.54 million in the prior-year period.
Net income attributable to the parent company's common shareholders came in at $6.82 million versus a net loss attributable of $59 thousand in the year-ago period. Also, its EPS stood at $0.23 in the same period.
In addition, the stock’s trailing-12-month net income margin and CAPEX/Sales of 5.24% and 4.19% are 25.2% and 29.3% higher than the industry averages of 4.19% and 3.24%, respectively. Likewise, its trailing-12-month ROTA of 3.86% is 5.9% higher than the industry average of 3.64%.
CAAS is expected to witness revenue growth of 7% and 4.7% for the fiscal years 2023 and 2024, reaching $566.71 million and $593.11 million, respectively. Its EPS is expected to increase by 10% per annum over the next five years. Moreover, it surpassed the EPS estimates in each of the trailing four quarters.
The stock has gained 84.2% over the past year to close the last trading session at $5.12.
CAAS’ POWR Ratings reflect these solid prospects. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and Value and a B for Sentiment. Within the same B-rated industry, it is ranked #3. To see the ratings of CAAS for Momentum, Stability, and Quality, click here.
Sunlands Technology Group (STG)
STG is a China-based company that provides online education services through online and mobile platforms. It offers various degree and diploma-oriented post-secondary courses, including preparation courses for the self-taught higher education examination (STE) for learners pursuing associate diplomas or bachelor’s degrees and for the entrance examinations of Master of Business Administration programs.
STG’s trailing-12-month EV/Sales and EV/EBIT multiples of 0.07 and 0.26 are 94.1% and 98.3% lower than the industry averages of 1.19x and 14.79x, respectively. Likewise, its trailing-12-month EV/EBITDA of 0.24x is 97.8% lower than the industry average of 10.88x.
During the first quarter that ended March 31, 2023, STG’s net revenues came in at RMB566.88 million ($78.85 million). Its non-GAAP income from operations increased 4% year-over-year to RMB177.99 million ($24.76 million).
The company’s net income and EBITDA (non-GAAP) grew marginally from the year-ago value to RMB180.11 million ($25.05 million) and RMB190.99 million ($26.57 million), respectively.
STG’s revenue has increased at a marginal CAGR over the past three years and a CAGR of 13.3% over the past five years.
In addition, the stock’s trailing-12-month net income and EBIT margins of 28.26% and 27.41% are 574.9% and 273.8% higher than the industry averages of 4.19% and 7.33%, respectively. Likewise, its ROTC of 768.2% compares with the industry average of 6.15%.
STG’s shares have gained 31.5% over the past month to close the last trading session at $4.85.
It is no surprise that STG has an overall rating of A, equating to a Strong Buy in our proprietary rating system. It has an A grade for Value and Quality and a B for Sentiment. In the same industry, it is ranked #3.
In addition to the POWR Ratings stated above, we have also given STG grades for Growth, Momentum, and Stability. Get all STG ratings here.
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XYF shares were trading at $4.45 per share on Monday afternoon, up $0.04 (+0.91%). Year-to-date, XYF has gained 47.35%, versus a 19.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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