In the 12-year cycle of animals in the Chinese zodiac, 2024 will be the Year of the Dragon. If equity investors get their way, it will be a green dragon.
Barring a big December rally, China’s stock market will finish in the red for the third consecutive year in 2023. Chinese stocks listed in New York, Hong Kong, Shanghai and Shenzhen have lost approximately $1 trillion in market value this year for a host of reasons.
The world’s second-largest economy is experiencing a bumpy recovery from the Covid pandemic. As third-quarter GDP data confirmed, consumer spending is relatively healthy. The property market, on the other hand, remains in a state of turmoil. Then you have a depreciating currency in the yuan, which has ramped up pressure on China’s government to stimulate growth.
The good news is that China is on pace to meet its 5% growth target, albeit a conservative one. With the emerging market expected to deliver extra special growth this decade, stimulus measures have been effective but not enough to appease investors.
While the S&P 500 index is up 19% year-to-date, the Shanghai Composite index is down almost 5%. Popular U.S.-listed megacaps like Alibaba, Tencent and Baidu are in the red.
Given the sharp performance disparity between U.S. and China stocks, a rotation to the Far East may be a good portfolio strategy ahead of the February 10th start of the Chinese New Year.
After all, the Shanghai Composite is trading at just 12x trailing earnings compared to the S&P 500 at 21x. If China’s housing crisis improves and economic growth accelerates, investors could be in for some fiery gains in the Year of the Dragon.
Of course, the Shanghai Composite’s valuation is where it is because it has been assigned a ‘risk discount.’ But as the volatile market inevitably gets de-risked, these three stocks could benefit from having strong risk-reward profiles.
#1 - ZTO
ZTO Express (Cayman) Inc. (NYSE:ZTO) is China’s leading express delivery company by parcel volume. It supports both brick-and-mortar and e-commerce retailers through 96 sorting hubs, 31,000 pickup and delivery outlets and 100,000 last-mile posts.
The company is benefiting from China’s online shopping rebound in a big way. Third quarter adjusted net income was up 25% year-over-year to RMB 2.3 billion. After delivering more than 7.5 million parcels during the period, ZTO’s market share expanded to 22.4%. Price competition has intensified, but rather than get bogged down in a pricing war, management has opted to focus on improving service quality to boost earnings and maintain its market leadership.
An expanding market share in China’s massive e-commerce opportunity has Wall Street thinking 2024 could be the year of the bull for ZTO. Three firms have issued buy ratings since the Q3 update. Their average price target of $34.00 points to 60% upside over the next 12 months.
#2 - NTES
Up 40% year-to-date, NetEase, Inc. (NASDAQ: NTES) has been an outperformer in 2023 — and analysts are expecting more of the same next year. Wall Street is unanimously bullish on the online gaming and services provider with a perfect 10 out of 10 firms calling the stock a buy. The $135.00 consensus price target suggests NetEase can run another 33% from here.
NetEase is winning over the Street and investors because its growth has been impressive despite operating in a tough environment for Chinese technology companies. Revenue increased 12% in the third quarter, a reflection of consumers’ willingness to spend on digital games, music and learning tools. All four operating units recorded growth, including the core gaming business, which amassed 50 million players for its blockbuster Justice mobile game.
#3 - BYDDY
BYD Company Limited (OTCMKTS: BYDDY) is an industrial conglomerate best known for its electric vehicles (EVs) and energy solutions. On Friday, the company announced that November production and sales volumes were up 66% and 64%, respectively. The bulk of the growth came from ‘battery’ EVs, plug-in hybrid EVs and ‘new energy’ vehicles. BYD also makes electric-powered commercial vehicles, including buses.
The results coincided with two major milestones: 1) BYD zoomed past Nissan by selling more than 300,000 new energy vehicles during the month and 2) due in large part to a partnership with Mercedes-Benz, the company is taking market share from Tesla in China.
This week, BYD was upgraded from Neutral to Overweight at J.P. Morgan. Look for it to continue closing the gap between rival Tesla — and outrun the dragon in 2024.
