We recently published a list of 7 Cheap Chinese Stocks To Invest In Now. In this article, we are going to take a look at where NetEase (NASDAQ:NTES) stands against the other cheap Chinese stocks to invest in now.
The Economy of China
According to a report by the International Monetary Fund (IMF), China’s economy is projected to grow by 5% in 2024 and 4.5% in 2025, which is an upward revision of 0.4 percentage points for both years compared to the April projections. This growth is driven by strong Q1 GDP data and recent policy measures. However, risks are tilted to the downside due to a greater and longer-than-expected property sector adjustment and increasing fragmentation pressures.
In terms of inflation, the IMF expects core inflation to rise but remain low, with core inflation increasing only gradually to 1% in 2024. Over the medium term, growth is expected to decelerate to 3.3% by 2029 due to ageing and slower productivity growth.
China’s economy is facing challenges due to weak consumer spending amid economic issues such as a prolonged housing slump and high youth unemployment. Chinese tech firms are increasingly focusing on artificial intelligence (AI) as a potential new revenue stream. However, intense global competition limits the effectiveness of this approach.
The Chinese government needs to implement policies that restore consumer confidence and boost spending. In the second quarter of 2023, foreign investors pulled nearly $15 billion out of China due to the slowdown in economic growth and rising geopolitical tensions. The rapid shift towards electric vehicles in China has also caught some foreign car manufacturers off guard, leading them to scale back or withdraw their investments. China’s balance of payments has turned negative. If this trend continues, it could result in the first annual net outflow of foreign investment since 1990.
Despite efforts by the Chinese government to attract and retain foreign investment, such as lowering interest rates and encouraging the inflow of advanced technologies, foreign direct investment into China during the first half of the year was the lowest since the pandemic began in 2020. Chinese companies have been increasing their outbound investments, particularly in projects such as electric vehicles and battery factories, sending a record $71 billion overseas in the second quarter of 2023, up more than 80% compared to the same period in the previous year.
A Closer Look at China’s Investment Trends
Billionaire investor David Tepper, founder of Appaloosa Management, believes that Chinese stocks are undervalued, particularly compared to U.S. stocks, with many Chinese companies having single-digit P/E ratios despite high growth rates. Tepper expresses optimism about China’s economic measures, emphasizing that the Chinese government is actively promoting consumption and taking aggressive steps that investors have long called for. In his view, China’s internal fiscal stimulus is a major driver for growth, downplaying external risks such as tariffs and focusing on how these actions could benefit the country’s economy and related markets, such as Japan and South Korea. He points out that other major economies, such as Europe and Japan, are also lowering rates, but China’s measures seem more aggressive and promising, especially for investors.
Timothy Moe, Chief Asia Pacific Equity Strategist at Goldman Sachs, has an optimistic outlook for the APAC equity markets amid recent volatility. Regarding China, Moe points out its weaker performance relative to other APAC markets but notes its diversification benefits. He stresses the need for more policy support from Chinese authorities to boost domestic demand and economic growth. Moe is strategically positive on China’s A-shares due to their potential benefit from structural market developments but prefers offshore Chinese equities in the short term. Looking ahead, he forecasts a 12% earnings growth for the APAC region in 2025, slightly below consensus expectations.
China’s economic growth is expected to slow down in the coming years, with projected growth rates of 5% in 2024 and 4.5% in 2025. Despite efforts by the government to stimulate growth, the economy is facing challenges such as weak consumer spending, a prolonged housing slump, and high youth unemployment.
Our Methodology
To compile our list of 7 cheap Chinese stocks to invest in now, we used Yahoo and Finviz stock screeners to compile an initial list of 40 Chinese companies. From that list, we screened for companies that are trading at a forward P/E ratio of under 15 as of September 29. We then narrowed our choices to 7 stocks according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of their hedge fund sentiment, as of the second quarter.
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).
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NetEase (NASDAQ:NTES)
Number of Hedge Fund Investors: 35
Forward P/E Ratio as of September 29: 13.07
NetEase (NASDAQ:NTES) focuses on online services, with its core operations concentrated in the gaming, education, and e-commerce sectors. The company’s gaming division is responsible for developing and publishing a vast array of popular mobile and PC games, both within China and globally. With a portfolio of over 100 game products, NetEase (NASDAQ:NTES) has established itself as a notable player in the industry, forming strategic partnerships with renowned gaming companies, including Blizzard.
NetEase (NASDAQ:NTES) boasts a robust pipeline of upcoming game releases, with several recent launches. Notably, the company’s Naraka: Bladepoint Mobile,, launched in China in July, has garnered positive reviews from players. Furthermore, its Hero Shooter and Marvel Rival have also received enthusiastic feedback from the gaming community. Expanding its reach, NetEase (NASDAQ:NTES) has also successfully launched Marvel Rivals on prominent gaming platforms, including PlayStation 5, Xbox Series X|S, and PC.
NetEase (NASDAQ:NTES) has an impressive $19 billion in cash and equivalents against almost no debt burden. This financial stability provides the company with the flexibility to aggressively invest in research and development (R&D) initiatives, as well as take risks on innovative new game releases. The combination of NetEase’s (NASDAQ:NTES) solid financial foundation and its promising pipeline of upcoming games makes the company an attractive investment opportunity.
NetEase’s (NASDAQ:NTES) stock is trading 13.07 times its forward-year earnings, which represents a 6.21% discount to the sector median of 13.94. The company’s earnings are expected to grow by almost 1% this year. However, industry analysts have a consensus Buy rating on the stock, setting an average share price target of $115.34, which indicates a 20.83% upside potential from its current levels. As of the second quarter, 35 hedge funds own stakes in the company valued at $993.75 million. According to Insider Monkey’s hedge funds database, Orbis Investment Management is the largest shareholder, with stakes worth $182.28 million.
Overall NTES ranks 4th on our list of cheap Chinese stocks to invest in now. While we acknowledge the potential of NTES 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 NTES but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.