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Are TCEHY and BABA the Must-Have Stocks for China Investors?

Despite facing several challenges, the Chinese economy has demonstrated exceptional resilience lately. With several stimulus measures in place and the pipeline, should China investors consider buying Alibaba Group (BABA) and Tencent Holdings (TCEHY)? Read on to learn my view...

China, the world’s second-largest economy, has faced several challenges, including a struggling property market, record youth unemployment, subdued consumption, deflation, loss of consumer confidence, and declining birth rates.  However, the Chinese authorities are undertaking several corrective measures to get the economy back on track.

Against this promising backdrop, investors looking to invest in China could consider buying fundamentally strong stocks Alibaba Group Holding Limited (BABA) and Tencent Holdings Limited (TCEHY).

According to official figures issued by the National Bureau of Statistics, China's economy expanded faster than predicted in the first quarter. GDP grew 5.3% year-over-year during the first quarter, driven by a surge in industrial output and retail sales. The strong GDP expansion in the first quarter positions the country well to achieve its 5% growth target for 2024.

The stimulus measures are beginning to show their desired effects as China’s manufacturing activity expanded for the first time in six months in March. The purchasing managers’ index (PMI) rose to 50.8 in March from 49.1 in February. Moreover, China’s exports and imports both rose 1.5% year-over-year in the first quarter.

Chairman of the Standing Committee of the National People’s Congress, Zhao Leji, believes that China’s import and export of goods will exceed $32 trillion in the next five years. Retail sales of consumer goods rose 4.7% year-over-year in the first quarter, and online retail sales grew 12.4% over the prior-year period.

With policymakers rolling out support measures to revive household consumption, private investment, and market confidence, domestic demand is expected to recover strongly.

Considering these encouraging trends, let’s discuss the fundamentals of the two China stock picks, starting with the second choice.

Stock #2: Alibaba Group Holding Limited (BABA)

BABA, headquartered in Hangzhou, China, provides merchants, retailers, and other businesses with technology infrastructure and marketing reach for enhanced user and customer engagement. It operates in China Commerce, International Commerce, Local Consumer Services, Cainiao, Cloud, Digital Media and Entertainment, Innovation Initiatives, and Others segments.

BABA’s trailing-12-month EBITDA margin of 19.59% is 77.2% higher than the industry average of 11.05%. Likewise, the stock’s trailing-12-month net income margin of 10.81% is 133.4% higher than the 4.63% industry average. Also, its trailing-12-month levered FCF margin of 15.77% is 185.5% higher than the 5.52% industry average.

For the fiscal third quarter that ended December 31, 2023, BABA’s revenue increased 5.1% year-over-year to $36.67 billion. Its adjusted EBITA grew 2% from the year-ago value to $7.44 billion. The company reported non-GAAP net income and non-GAAP earnings per share of $6.75 billion and $2.37, respectively.

In addition, as of December 31, 2023, the company’s cash and cash equivalents came in at $35.89 billion, and its current assets were $113.70 billion.

Analysts expect BABA’s revenue for the quarter ended March 31, 2024, to increase 2.6% year-over-year to $30.37 billion. For the fiscal year ended March 31, 2024, BABA’s EPS and revenue are expected to grow 9.4% and 5.5% year-over-year to $8.48 and $130.20 billion, respectively.

The company surpassed the consensus EPS estimates in three of the trailing four quarters. Shares of BABA have gained marginally over the past three months to close the last trading session at $69.61.

BABA’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

BABA has a B grade for Momentum and Quality. Within the B-rated China industry, it is ranked #9 out of 39 stocks. To see the additional ratings of BABA for Growth, Value, Stability, and Sentiment, click here.

Stock #1: Tencent Holdings Limited (TCEHY)

Headquartered in Shenzhen, People’s Republic of China, TCEHY is an investment holding company that offers value-added services (VAS), online advertising, fintech, and business services internationally. It operates through VAS, Online Advertising, FinTech, Business Services, and Others segments.

TCEHY’s trailing-12-month Return on Common Equity of 15.06% is 421.8% higher than the 2.89% industry average. Its trailing-12-month levered Return on Total Assets of 7.30% is 547.2% higher than the 1.13% industry average. Additionally, its 18.92% trailing-12-month net income margin is 712.5% higher than the 2.33% industry average.

During the fourth quarter ended December 31, 2023, TCEHY’s revenues increased 7.1% year-over-year to RMB155.20 billion ($21.44 billion). Its gross profit increased 25.5% from the year-ago value to RMB77.56 billion ($10.72 billion).

For the same quarter, the company’s non-IFRS profit attributable to equity holders of the company rose 42.6% year-over-year to RMB42.68 billion ($5.90 million). Also, its EPS for profit attributable to equity holders of the company stood at RMB2.80.

For the quarter that ended March 31, 2024, TCEHY’s EPS and revenue are expected to increase 32.7% and 2.2% year-over-year to $0.64 and $21.90 billion, respectively. Over the past three months, the stock has gained 7.6% to close the last trading session at $38.38.

TCEHY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.

It is ranked #7 in the same industry. It has a B grade for Stability and Sentiment. To see the additional TCEHY ratings for Growth, Value, Momentum, and Quality, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

TCEHY shares were trading at $38.21 per share on Wednesday morning, down $0.17 (-0.44%). Year-to-date, TCEHY has gained 1.11%, versus a 5.84% rise in the benchmark S&P 500 index during the same period.

About the Author: Rashmi Kumari

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.


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