Anticipating accelerated expansion in 2024, China's economy signals an upward trajectory. Hence, it seems wise to consider investing in strong China stocks, China Automotive Systems, Inc. (CAAS), LexinFintech Holdings Ltd. (LX), and X Financial (XYF), for potential gains this year. These stocks are rated A (Strong Buy) in our proprietary POWR Ratings system.
Before delving into the fundamentals of the stocks, let’s look into the prospects of China’s economy.
This year, China's economy stands at a crucial juncture, marked by cautious optimism and strategic shifts in the face of challenges. Despite obstacles, China is actively spearheading substantial economic reforms to enhance its trajectory and overcome prevailing difficulties.
Analysts are predicting a favorable trajectory for the nation’s stability, anticipating heightened investments, ongoing consumer recovery, and potential export enhancements. Their optimism stems from robust year-on-year growth rates across diverse sectors, as indicated by November data from the National Bureau of Statistics.
In November, there was an escalation in growth rates for industrial value-added output, service sector production, total retail sales of consumer goods, and fixed-asset investment, surpassing the figures recorded in October.
According to Yang Delong, Chief Economist of First Seafront Fund, the positive trajectory of China's economy remains unaltered. The nation's economic revival is accompanied by significant strides in high-quality development, characterized by advancements in constructing a modern industrial system and breakthroughs in technological innovation.
Chinese Communist Party's finance and economy office officials also anticipate 2024 to bring more favorable conditions and opportunities than challenges for the economy. Macroeconomic policies will persist in providing crucial support for ongoing economic recovery efforts.
A top government think tank, the Chinese Academy of Sciences (CAS), projects a potential 5.3% growth for China's economy this year. Despite the World Bank's steadfast 4.5% projection in its latest report, CAS anticipates the stabilization of the world's second-largest economy in the same period.
Hong Yongmiao, Director of the CAS Centre for Forecasting Science, asserts that China could attain a higher growth rate by stabilizing market expectations. CAS envisions a gradual start, with a 5% growth rate in the first quarter, followed by an accelerated pace later in the year for China's economy.
Considering this encouraging outlook, let’s look at the fundamentals of the three China stocks.
Stock #3: China Automotive Systems, Inc. (CAAS)
Based in Jingzhou, China, CAAS designs and markets automotive systems and components. The company manufactures rack and pinion power steering gears, power steering parts, sensor modules, automobile steering systems, columns, electronic, and hydraulic power steering systems and components for various vehicle types.
In terms of trailing-12-month EV/Sales, CAAS is trading at 0.08x, 93.5% lower than the industry average of 1.23x. Its trailing-12-month EV/EBITDA of 0.97x compares to the industry average of 10.91x. Additionally, the stock’s trailing-12-month Price/Sales of 0.17x is 81.5% lower than the 0.91x industry average.
Over the past three years, CAAS’ revenue and EBITDA increased at a CAGR of 12.2% and 46.9%, respectively. Moreover, its tangible book value grew at a CAGR of 4.2%. Additionally, the company’s total assets rose at a CAGR of 2% over the same time frame.
For the fiscal 2023 third quarter that ended September 2023, CAAS’ gross profit grew 18.4% year-over-year to $24.76 million. Its income from operations rose 107.8% from the year-ago value to $10.15 million.
In addition, net income and net income attributable to the parent company’s common shareholders per share increased 40.4% and 29.2% from the prior year’s period to $11.24 million and $0.31, respectively.
Analysts expect CAAS’ revenue to increase 4.7% year-over-year to $593.11 million for the fiscal year 2024. Shares of CAAS marginally gained intraday, closing the last trading session at $3.07.
CAAS’ solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
CAAS has an A grade for Value and a B for Growth, Stability, and Sentiment. It is ranked #7 out of 96 stocks within the A-rated China industry.
In addition to the POWR Ratings I’ve highlighted, you can see CAAS’ Quality and Momentum ratings here.
Stock #2: LexinFintech Holdings Ltd. (LX)
Headquartered in Shenzhen, China, LX provides online consumer finance services. It operates Fenqile.com, an online consumption and finance platform that facilitates installment purchases, personal installment loans, and online direct sales with installment payment terms. Also, LX manages Le Hua Card, specializing in scenario-based lending.
In terms of forward non-GAAP P/E, LX is trading at 1.84x, 82.3% lower than the industry average of 10.38x. Its forward EV/Sales of 0.50x is 84.2% lower than the industry average of 3.20x. In addition, the stock’s forward Price/Sales of 0.18x is 93.2% lower than the 2.65x industry average.
Over the past three years, LX’s revenue and EBITDA grew at a CAGR of 2.3% and 12.2%, respectively. Furthermore, its net income and EPS increased at respective CAGRs of 31% and 32.9% during the same period.
For the fiscal 2023 third quarter that ended September 30, 2023, LX’s total operating revenue increased 30.4% year-over-year to $480.94 million. Its gross profit grew 51.2% from the year-ago value to $185.90 million.
Furthermore, adjusted net income and adjusted net income per ordinary share attributable to ordinary shareholders of the company rose 26.2% and 34.5% from the prior year’s period to $57.19 million and $0.16, respectively.
Analysts expect LX’s revenue to increase 22.3% year-over-year to $1.76 billion for the fiscal year that ended December 2023. The company’s EPS for the same period is expected to increase 34.9% from the previous year to $1.06. The stock has gained 13.7% over the past five days, closing the last trading session at $2.04.
LX’s robust outlook is apparent in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
LX has an A grade for Value and a B for Momentum, Quality, and Sentiment. It is ranked #4 out of 96 stocks within the China industry.
Click here to access additional LX ratings for Growth and Stability.
Stock #1: X Financial (XYF)
Based in Shenzhen, China, XYF is a personal finance service provider operating as an online marketplace linking borrowers and investors. The company offers various loan products, including Xiaoying credit loans encompassing Xiaoying card loans, Xiaoying preferred loans for small business owners, and Xiaoying revolving loans.
In terms of trailing-12-month EV/Sales, XYF is trading at 0.14x, 95.6% lower than the industry average of 3.18x. Its trailing-12-month EV/EBITDA of 0.43x compares to the industry average of 11.63x. Furthermore, the stock’s trailing-12-month Price/Sales of 0.32x is 88.2% lower than the 2.68x industry average.
Over the past three years, XYF’s revenue increased at a CAGR of 28.8%. Its tangible book value grew at a CAGR of 15.2%. In addition, the company’s total assets rose at a CAGR of 11.1% over the same time frame.
During the fiscal 2023 third quarter that ended September 30, 2023, XYF’s total net revenue increased 56.1% year-over-year to $191.46 million. Its income from operations rose 44.7% from the year-ago value to $59.59 million.
Additionally, the company’s adjusted net income and adjusted net income per share grew 62% and 80% from the prior year’s period to $51.33 million and $0.17, respectively.
The stock has gained 9.2% over the past month, closing the last trading session at $4.17.
XYF’s strong prospects are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
XYF has an A grade for Value and a B for Growth, Stability, and Sentiment. It is ranked #3 within the same industry.
Click here to access the additional XYF ratings (Momentum and Quality).
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.
LX shares were trading at $2.11 per share on Thursday morning, up $0.07 (+3.43%). Year-to-date, LX has gained 14.67%, versus a -0.48% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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