We recently published a list of 7 Most Profitable Chinese Stocks To Invest In. In this article, we are going to take a look at where New Oriental Education & Technology (NYSE:EDU) stands against the other most profitable Chinese stocks to invest in.
China’s Economic Growth
According to a report by the IMF, the economy of China is expected to grow 5% in 2024 and 4.5% in 2025, marking an upward revision of 0.4 percentage points from the previous April projections. This growth is largely driven by robust Q1 GDP data and recent policy measures. However, the IMF warns of potential risks on the downside, citing a prolonged and more severe-than-expected adjustment in the property sector and increasing fragmentation pressures.
In terms of inflation, the IMF forecasts a moderate increase in core inflation to 1% in 2024, with growth expected to slow down to 3.3% by 2029 due to demographic challenges and slower productivity growth. China’s economy is facing weak consumer spending due to a prolonged housing slump and high youth unemployment. In an effort to diversify revenue streams, Chinese tech firms are focusing on artificial intelligence (AI). However, there is intense global competition which limits the effectiveness of this approach.
The government needs to implement policies that boost spending and restore consumer confidence. The recent slowdown in economic growth and rising geopolitical tensions have led to a significant outflow of foreign investment, with nearly $15 billion pulled out of the country in the second quarter of 2023. Some foreign car manufacturers have also scaled back or withdrawn their investments due to the rapid shift towards electric vehicles in China. As a result, China’s balance of payments has turned negative, which could potentially result in the first annual net outflow of foreign investment since 1990.
Buy Everything Related to China, Says Billionaire David Tepper
Billionaire investor, David Tepper, founder of Appaloosa Management, has expressed an extremely bullish opinion on his investments, particularly in China. In an interview on CNBC on September 26, he stated that he is increasing his exposure to Chinese stocks, citing the country’s efforts to stimulate its economy. Tepper believes that China’s plans to inject $142 billion of capital into top state-owned banks and implement positive policies will boost the economy and lead to a surge in Chinese stocks. As a result, he is “buying everything” related to China.
Tepper’s strategy is not limited to individual Chinese stocks, as he is also investing in Chinese ETFs. He believes that these ETFs offer a convenient way to gain exposure to a basket of Chinese companies. Tepper’s bullishness on China is not without risk, as he acknowledges that there are still challenges facing the country’s economy. However, he believes that the potential rewards outweigh the risks and is willing to take on that risk.
In contrast, Tepper is less enthusiastic about the US market, citing valuation concerns. He believes that the US market is not as attractive as the Chinese market, and is therefore allocating more of his portfolio to Chinese stocks. However, he still owns significant positions in US companies.
As China navigates its economic challenges, the government will need to strike a balance between stimulating growth and addressing the issues that are hindering consumer spending and investment. However, David Tepper’s move to increase his exposure to Chinese stocks and ETFs reflects investor confidence in the country’s economic recovery and growth potential.
Our Methodology
For this article, we used Finviz and Yahoo Finance stock screeners plus online rankings to compile an initial list of the 40 largest companies in China by market cap. From that list, we narrowed our choices to 7 stocks with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha, which provided insights into 5-year growth rates, and Macrotrends, which supplied information on trailing twelve-month (TTM) net income. Then we sorted the stocks in ascending order, according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024.
Why do we care about what hedge funds do? 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).
A student concentrate on their laptop in the library, taking advantage of an educational program online.
New Oriental Education & Technology (NYSE:EDU)
TTM Net Income: $310 Million
5-Year Net Income CAGR: 5.39%
Number of Hedge Fund Holders: 37
New Oriental Education & Technology (NYSE:EDU) is a leading provider of private educational services in China, offering tutoring, K-12 education, test preparation, vocational training and language training. The company has built itself as a trusted name in the Chinese education market.
New Oriental Education & Technology (NYSE:EDU) has demonstrated impressive financial growth, with a net income of $0.310 billion for the twelve months ending May 31, representing a significant 74.57% year-over-year increase, and a 5-year net income compound annual growth rate (CAGR) of 5.39%, while also attracting the attention of institutional investors, with 37 hedge funds holding stakes in the company who invested a total of $1.27 billion.
The company is also expected to achieve significant operating margin expansion in the near future, driven by strong revenue growth and the improved utilization rate for new learning centers. In Q4, New Oriental Education & Technology’s (NYSE:EDU) revenue rose by 32.1% YoY to $1.13 billion, and the company has guided its top line for its core education services business to increase by between 31% YoY and 34% YoY for Q1 2025. This robust revenue growth is expected to drive an improvement in the company’s operating margin as the company’s new learning centers mature.
In August, New Oriental Education & Technology (NYSE:EDU) indicated its intention to consider additional dividend distributions in the future with the share repurchase program increased from $400 million to $700 million. The upsized share repurchase program is effective through May 31, 2025.
Overall EDU ranks 4th on our list of most profitable Chinese stocks to invest in. While we acknowledge the potential of EDU 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 EDU 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.