Chinese stocks are in a rut. So says a recent article from Barron’s. Barron’s contributor Reshma Kapadia wrote on June 26:
“After staging a recovery in the first five months of the year, they have again lost steam as investors look to authorities to do more to revive the economy, heal the property market, and boost confidence at two coming policy meetings.”
The iShares MSCI China ETF (NASDAQ:MCHI) was up more than 16% year to date through May 17 due to low valuations. However, little action from the Chinese government has cut about $4.40 from its share price (9%) in the 40 days since.
Investors are hoping that the July meeting of the Communist Party’s Politburo will deliver important economic decisions and policies to kickstart the Chinese economy. Even more important, the author suggested the meeting of the Third Plenum could lead to tangible actions taken.
I’m no expert on business in the country but these three Chinese stocks appear to be thriving despite China’s struggling economy.
Yum China Holdings (YUMC)
Yum China Holdings (NYSE:YUMC) reported its Q1 2024 results at the end of April. Business is getting back to normal moving into the second half of 2024.
“We achieved solid sales growth in the first quarter with total revenues hitting an all-time high. Our core operating profit grew modestly from last year’s high base and EPS was up double digits excluding foreign currency,” stated CEO Joey Wat in the Q1 2024 press release.
“Meanwhile, we are marching forward with our expansion initiatives in a disciplined manner, bringing our total store count to a milestone of 15,000 stores.”
In January, I included Yum China among three Chinese consumer stocks to buy for the expected turnaround. At the time, 28 of 31 analysts rated it a Buy with a $60.10 target price. Today, analysts are slightly less enthusiastic, with 26 out of 30 rating it a Buy, with a $51.14 target price, 62% higher than where it’s currently trading.
With its shares down 26% year to date, it plans to return $1.5 billion to shareholders in 2024 with $257 million for dividends (17%) and $1.24 billion (83%) for share repurchases.
H World Group (HTHT)
H World Group (NASDAQ:HTHT) is a name I’m not familiar with. However, the hotel operator with 9,817 hotels and 955,657 rooms in 18 countries — it brands include Hi Inn, Elan Hotel, HanTing Hotel, JI Hotel, Starway Hotel, and many others — seems to be doing just fine despite its share price being down 14% over the past year.
In the first quarter of 2024, the company opened 569 hotels, more than double in Q1 2023. It also closed far fewer (148) in Q1, 61 less than a year ago. Equally important, it has 3,138 hotels in its development pipeline, up 36% from 2,304 in Q1 2023. Of those hotels in the pipeline, 63% are midscale or higher, up from 61% a year ago.
As of March 31, it had hotels in 1,290 Chinese cities, up from 1,132 a year ago. Its target is to be 2,000 cities, with many of them in smaller cities with less competition. Approximately 6% of its hotels are leased and owned while 94% are managed or franchised,
Revenues in the first quarter were 17.8% higher than Q1 2023, to $731 million. That was due to higher occupancy rates and ADRs (average daily rates) in the quarter. Its adjusted net income was $107 million, 100% higher than a year earlier.
It’s loved by the analysts. Of the 25 covering it, all 25 rate it a Buy.
PDD Holdings (PDD)
PDD Holdings (NASDAQ:PDD) is also liked by analysts. Approximately 96% of the 49 analysts covering the online retailer rate it a Buy.
A Bloomberg article from late May highlighted the fact that PDD stock was trading near its cheapest level ever due to potential tariffs from the U.S.
“‘People are worried about election risks and potential tariffs coming for PDD, leading many to attach zero or even negative value to Temu,’ said Shuyan Feng, deputy general manager for investment management at Huatai Asset Management (Hong Kong),” Bloomberg reported on May 27.
According to Bloomberg, the owner of the Temu marketplace, trades at 13x its expected 2024 earnings, a multiple that’s about half the average Nasdaq 100 stock. With the U.S. government ordering ByteDance to divest TikTok, investors are discounting PDD’s valuation due to the regulatory risks surrounding Temu, which some say doesn’t protect the rights of consumers enough.
Interestingly, PDD is the only company in the top 15 stocks of the Kraneshares CSI China Internet Fund (NYSEARCA:KWEB) that doesn’t have a share repurchase program. That’s an additional reason investors have stayed away. Its shares are down 5% YTD as a result.
If you have some money to invest in PDD, and you want to lower your risk, you might take 10-20% of those funds and buy PDD stock, investing the remaining 80-90% in the ETF.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
