We recently compiled a list of the 10 Best Chinese Stocks to Buy Right Now. In this article, we are going to take a look at where Alibaba Group Holding Limited (NYSE:BABA) stands against the other Chinese stocks.
Nearly every major equity market is up for the year owing to improved investor sentiments. However, it is an exception for Chinese equity markets that continue to underperform while hovering near the zero-COVID lockdown valuations of three years ago.
Over the past three years, about $6 trillion has been wiped off the value of Chinese stocks. The global index compiler MSCI has already announced plans to remove up to 60 Chinese stocks from its gauges as it responds to the underperformance of recent years. The cut will signify the waning need and demand for some of the country’s equities to overseas investor’s portfolios. Amid the cuts, the index will still keep hold of some of the best Chinese stocks to buy now.
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The underperformance comes amid growing concerns about the Chinese economy, which continues to send jitters to the investment community. The Chinese economy has always outperformed the US economy, increasing by 123% between 2012 and 2022, compared to 58% for the US.
Nevertheless, the Chinese economy has struggled in recent years amid a myriad of problems, including a downturn in the real estate sector, deflation, high debt levels, and a shift in ideology-driven policies that are scaring away foreign firms from the economy.
While the economy grew by 5.2% last year, much higher than 2.5% for the US, it was the lowest pace of growth since 1990, with the exception of the pandemic period. While economists expected the economy to slow even further in 2024, with growth averaging 4.5%, it has started showing signs of recovery. The Chinese economy grew 5.3% in the first quarter and 4.7% in the second quarter.
Nevertheless, the 4.7% growth in the second quarter, while reasonable, is far below the country’s double-digit growth rates in the past decades, which is a major point of concern in the equity markets. On the other hand, the slowdown in economic growth is not the only headwind that scares investors from the Chinese economy.
Deteriorating US-China relations has always rattled investors’ sentiments. With the US hitting Chinese firms with trade tariffs and restricting access to some key technologies, China has also hit back with its fair share of tariffs. The tariff hike on Chinese electric vehicles from 25% to 100% and the imposition of trade tariffs on $18 billion worth of imports underline the ever-deteriorating relations between the two economic powerhouses.
Amid the deteriorating macroeconomics, Chinese stocks have started showing signs of recovering in the second half of the year. Some of the promising sectors include the fixed asset investments sector, which is driven by faster manufacturing and infrastructure investment. Additionally, industrial production and services are also on the rise while playing host to some of the best Chinese stocks to buy.
In July, global hedge funds added holdings of some of the best Chinese stocks to buy now as most took advantage of their depressed valuations after steep pullbacks. Nevertheless, the hedge fund positions holdings remain near a five year low.
Additionally, analysts at BCA Research believe Chinese equities could insulate fund managers from deep losses as global risk assets face fresh dangers. The firm has already upgraded Chinese onshore equities to overweight from neutral.
“We expect Chinese stocks to fall by less than or as much as their global and EM peers in a bear market,” analysts, including chief China strategist Arthur Budaghyan, said in the report. Potential market support from Chinese state-owned funds could temper potential declines, he added.
As the economic situation in China improves and sentiments in the equity market improve, now could be the best time to pay close watch to the best Chinese stocks to buy, likely to outperform heading into year-end.
Our Methodology
To compile the list of the 10 best Chinese stocks to buy now, we scanned through the top 50 companies listed on the US stock exchange from the iShares MSCI China ETF. Analysts believe these companies have significant upside potential. Once we had a consolidated list, we ranked the best Chinese stocks in ascending order of their upside potential, as of August 17.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An e-commerce platform displaying a wide range of products to customers online.
Alibaba Group Holding Limited (NYSE:BABA)
Hedge Funds Holding Stakes: 91
Stock Upside Potential: 40.29%
Alibaba Group Holding Limited (NYSE:BABA) is a Chinese internet giant that provides technology infrastructure and marketing that helps merchants, brands, and retailers connect with users and customers. The company has rebounded from the 2021 antitrust crackdown, with revenue growth improving from 2% in fiscal 2023 to 8% in fiscal 2024, and the same expected for fiscal 2025. EPS is projected to rise by 34% year-over-year in fiscal 2025, driven by a growing operating margin exceeding 13% in the last four quarters.
Alibaba Group Holding Limited (NYSE:BABA)’s sentiments have received a boost after the e-commerce company announced plans to earn more service fees from merchants. The company plans to charge a basic software services fee of 0.6% on confirmed transactions for vendors on Tmall and Taobao.
The new measure is expected to boost Alibaba Group Holding Limited (NYSE:BABA)’s core merchant revenue and add multiple catalysts for the stock as it earns most of its revenues from Taobao and Tmall.
“We view the 0.6% software service fees starting in September as positive to core merchant revenue considering the new arrangement applies to both Taobao and Tmall,” Jefferies analysts led by Thomas Chong wrote in a research note.
According to Bank of America Securities analyst Joy Ju, Alibaba’s growth in merchandise volume should match the industry growth as the company works to regain growth momentum.
Alibaba Group Holding Limited (NYSE:BABA) is rated as a buy on Wall Street with an average price target of $111.29, implying a 40.29% upside potential from current levels. On the other hand, the Insider Monkey database indicates that 91 hedge funds held stakes in the company as of the end of Q2 2024.
Artisan Partners, an investment management company, has released its first quarter 2024 investor letter for the “Artisan Select Equity Fund.” Here’s what the fund had to say:
“Alibaba Group Holding Limited (NYSE:BABA) shares declined 7% during the quarter. There isn’t much new to say about Alibaba. There was no meaningful news that drove the share price decline. The earnings for the December quarter were fine, with revenues and profits both increasing 5%—not typically an exciting level of growth, but certainly enough to justify the company’s paltry valuation of 4X–5X EBIT. As we have written in recent letters, this is a valuation level that is normally reserved for a dying business, and Alibaba is not a dying business. Management continues to implement changes that are intended to increase shareholder value. Over the past year, they have changed management, adjusted the company structure, contemplated spinning off assets, made progress monetizing the balance sheet and have improved the capital allocation. All of these actions have yet to be reflected at all in the share price. This is a stock that could double and would still be cheap.”
Overall BABA ranks 9th on our list of the best Chinese stocks to buy. While we acknowledge the potential of BABA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BABA, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.