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 Yum China Holdings, Inc. (YUMC) 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).
The iconic yellow and red roof of a franchise restaurant in the bustling streets of a city.
Yum China Holdings, Inc. (NYSE:YUMC)
Hedge Funds Holding Stakes: 24
Stock Upside Potential: 41.11%
Yum China Holdings, Inc. (NYSE:YUMC) is a premier restaurant chain that owns, operates, and franchises restaurants in China. It generates revenues through direct restaurant operations, licensing fees, and additional services associated with its brands.
Yum China Holdings, Inc. (NYSE:YUMC) has been firing on all cylinders, going by the record revenue in Q2 2024 due to same-store transaction growth and new unit growth. Revenues in the quarter were up by 1% to a record high of $2.68 billion, as same-store sales reached 96% of last year’s levels. Diluted earnings per share were up 17% to $0.55, a record level.
The record revenues and earnings can be attributed to, among other things, a sharp focus on value for money and innovative products that continue to drive robust same-store transaction growth. Yum China Holdings, Inc. (NYSE:YUMC) has taken proactive steps to improve operational efficiency, stabilize restaurant margins, and generate more shareholder value.
Yum China Holdings, Inc. (NYSE:YUMC) is also investing significantly towards innovation, such as launching new menu items and marketing initiatives, which continue to attract customers and boost sales. Another positive aspect was the seamless internal transition in the C-suite, with CFO Andy Yeung set to step down in September and current CIO Adrian Ding taking over as acting CFO.
While the average price-to-earnings multiple for consumer cyclical stocks is 23, Yum China Holdings, Inc. (NYSE:YUMC) is currently trading at a forward P/E of 15. What this means is that the stock might be undervalued. Additionally, as one of the best Chinese stocks to buy, the stock rewards investors with a dividend yield of 1.91% for generating some passive income on the side.
Yum China Holdings, Inc. (NYSE:YUMC) remains a top pick for investors, as Wall Street analysts have rated the stock as a Buy. With an average price target of $48.26, this rating implies a significant 41.11% upside potential from the current levels, making it a promising investment opportunity. Insider Monkey database indicates that 24 hedge funds held stakes in the company as of the end of Q2 2024.
Baron Funds discussed the reasons behind Yum China Holdings, Inc. (NYSE:YUMC)’s decline in its Q4 2023 investor letter. Here’s what the firm mentioned:
“Yum China Holdings, Inc. (NYSE:YUMC) is the master franchisee for the YUM brands in China and operator of the KFC and Pizza Hut restaurant networks in that market. Shares detracted after the company reported a negative surprise on margins for the third quarter and hinted that increased competition and cost-consciousness among Chinese consumers could cause that margin compression to continue through the first quarter of 2024. Although in-year margins are volatile at Yum China, its pristine balance sheet, cumulative investments in technology, unmatched scale, and successful pivot to higher-ROI, smaller footprint stores in recent years should drive continued 8% to 10% store growth at attractive returns. Further, given its strong free-cash-flow generation and strong balance sheet, we believe the company is likely to offer capital returns to shareholders in excess of earnings over the next several years. We remain shareholders.”
Overall YUMC ranks 5th on our list of the best Chinese stocks to buy. While we acknowledge the potential of YUMC 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 YUMC, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.