In this piece, we will take a look at the 7 cheap chinese penny stocks to buy according to hedge funds.
As China navigates its ambitious economic goals for 2024, the spotlight is increasingly on undervalued investment opportunities, particularly in the realm of Chinese penny stocks. These low-priced stocks, often overlooked by mainstream investors, are gaining traction among hedge funds due to their substantial upside potential in a rapidly changing economic landscape. China’s economic trajectory has captured global attention, especially in the wake of recent discussions at the World Economic Forum’s Annual Meeting of the New Champions 2024. Premier Li Qiang, addressing the gathering of global leaders in Dalian, emphasized the vast potential of China’s market. “China’s large market is open,” he stated, underscoring the nation’s commitment to leveraging new industries and technological advancements to drive economic growth. Despite recent slowdowns, there is a prevailing optimism about meeting the country’s ambitious growth target of 5% for 2024.
The World Economic Forum’s discussions reflected a consensus on the critical role of new growth avenues and high-quality development. As China transitions from a period of high-speed growth to one of high-quality growth, industries such as artificial intelligence, digital financial services, and green technologies are poised to play pivotal roles. This transformation is supported by substantial investments in clean energy and research and development, areas where China is already making significant strides. Hedge funds, recognizing the potential for high returns in this evolving market, are turning their attention to Chinese penny stocks. These stocks, characterized by their low prices and high volatility, offer a unique opportunity for investors willing to navigate the risks associated with emerging markets. The attractiveness of these investments is heightened by China’s commitment to innovation and growth in key sectors, which could translate into substantial gains for early investors.
In a recent podcast episode, Laura Wang and Robin Xing from Morgan Stanley discussed their 2024 outlook for China’s economy and equity markets. Wang, the Chief China Equity Strategist, and Xing, the Chief China Economist, highlighted that China’s recovery post-reopening has been underwhelming in 2023, facing significant challenges in housing and local government financing. Xing noted that China is grappling with “3D problems”—debt, deflation, and demographics. Despite some progress in reflationary measures, the recovery remains uneven, and it may take time for economic stability to be achieved. To avoid a debt deflation loop, Xing suggested a comprehensive 5R action plan: Reflation, Rebalance, Restructuring, Reform, and Rekindle. This plan involves stimulating the economy, rebalancing towards consumption, restructuring troubled sectors, reforming state-owned enterprises, and revitalizing the private sector. Currently, only about 25% of this plan has been implemented, with expectations of reaching 50% by the end of 2024.
On demographics, Xing pointed out that China’s aging population is likely to dampen growth, with labor quantity lowering GDP growth by 40 basis points annually from 2025 to 2030. However, efforts to improve labor quality and revive private sector confidence could help mitigate this impact. Looking ahead, Morgan Stanley forecasts modest GDP growth recovery for 2024, expecting real GDP growth to rise slightly to 4.2% and a rebound in the GDP deflator to 0.6%. Challenges remain, particularly in stabilizing aggregate demand and managing housing and local government debt. Monetary policy is anticipated to stay accommodative with expected interest rate cuts. Regarding Chinese equities, Wang anticipates a largely range-bound market with limited upside, projecting the MSCI China index to reach a target of 60 by the end of 2024. While there are headwinds on corporate earnings, opportunities for high-quality investments in growth sectors remain. For investors, Wang recommends focusing on high-quality names with strong earnings and management, which can provide downside protection and upside potential when market conditions improve.
In this article, we will explore seven Chinese penny stocks that are currently drawing interest from hedge funds. These stocks are seen as promising due to their alignment with China’s strategic economic goals and their potential to benefit from the country’s evolving market dynamics. This examination will not only highlight the potential returns but also offer a deeper understanding of the investment landscape in China’s rapidly evolving economy. As China continues to open new avenues of growth and innovation, the opportunities within its penny stock market are becoming increasingly apparent.
7 Cheap Chinese Penny Stocks to Buy According to Hedge Funds
Our Methodology
For this article, we first used a stock screener to list down all Chinese penny stocks (under $5) with PE ratios under 20. We then picked 7 of these stocks with the highest number of hedge fund investors. We gauged hedge fund sentiment for these equities using Insider Monkey’s database of 912 hedge funds. The stocks mentioned in this article are penny stocks. Therefore the number of hedge funds bullish in these stocks is small.
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).
7 Cheap Chinese Penny Stocks to Buy According to Hedge Funds
07. Zhihu Inc. (NYSE:ZH)
Number of Hedge Fund Holders: 08
Zhihu Inc. (NYSE:ZH), headquartered in Beijing and founded in 2010, runs an online content community in China. The platform enables users to find inspiration, solve problems, make decisions, and enjoy themselves. Zhihu Inc. (NYSE:ZH) also provides technology, business support, consulting, information transmission, software, IT, and internet services. Additionally, the company offers marketing services, vocational training, and holds an audio-visual permit.
Zhihu Inc. (NYSE:ZH) is emerging as a leader in China’s content-driven online community, with its strategic focus on AI and high-quality content creation driving user engagement and positioning the company for profitability. The Q1 2024 earnings report highlights significant progress, with Zhihu Inc. (NYSE:ZH) achieving its sixth consecutive quarter of gross profit margin growth. This success stems from optimizing cost structures, reducing labor and user acquisition costs, and emphasizing high-return segments like paid memberships and vocational training. The company’s unique content ecosystem encourages active participation, making Zhihu Inc. (NYSE:ZH) a first mover in exploring new business models in the AI era. This shift has led to increased user engagement and a notable rise in content creators earning income on the platform. Vocational training revenue surged by 35.9% year-over-year, showcasing Zhihu Inc. (NYSE:ZH) ability to capitalize on emerging trends like AI-driven courses.
Zhihu Inc. (NYSE:ZH) integration of AI into content moderation and user engagement further enhances efficiency, reduces operational costs, and expands monetization opportunities. The company’s success in leveraging AI for operational improvements and new business ventures positions it well for sustained growth in China’s digital content landscape. In summary, Zhihu Inc. (NYSE:ZH) strategic advancements in AI, cost optimization, and monetization, combined with strong community engagement, make it a compelling investment with a clear path to profitability and long-term growth.
During Q2, 2024 the count of hedge funds holding positions in Zhihu Inc. (NYSE:ZH) grew to 8 from 5 in the prior quarter, as reported by Insider Monkey’s database encompassing 912 hedge funds. These holdings collectively amount to around $0.83 million. Phil Frohlich’s Prescott Group Capital Management emerged as the leading shareholder among these hedge funds during this timeframe.
06. UP Fintech Holding Limited (NASDAQ:TIGR)
Number of Hedge Fund Holders: 08
UP Fintech Holding Limited (NASDAQ: TIGR) demonstrates promising potential, with its Q1 2024 performance highlighting several positive aspects. The company reported total revenue of $78.9 million, marking the highest quarterly revenue in the past three years, with a 12.8% sequential increase and 19% growth year-over-year. This growth was driven by an improved revenue structure and enhanced operating efficiency, leading to a GAAP net income of $12.3 million, a significant 55% increase year-over-year. Additionally, the non-GAAP net income rose to $14.7 million, up 42% from the previous year, reflecting a strong recovery in profitability. UP Fintech Holding Limited (NASDAQ:TIGR) strategy of leveraging fixed costs through a growing user base and increased average revenue per user (ARPU) is paying off, contributing to sustainable profitability. The company added 28,800 new funded accounts in Q1 2024, with total client assets reaching $32.9 billion, a 7% sequential increase and a remarkable 104% year-over-year growth. This growth was largely driven by strong net asset inflows, particularly from Singaporean and institutional users.
The company’s focus on acquiring high-quality clients in key markets like Singapore and Hong Kong is evident, with average net asset inflows from newly acquired retail clients reaching over $14,000 in Singapore and $18,000 in Hong Kong. This strategy, coupled with UP Fintech Holding Limited (NASDAQ:TIGR) industry-leading low clearing costs and efficient operations, positions the company well for future growth. Moreover, UP Fintech Holding Limited (NASDAQ:TIGR) has been expanding its product offerings and improving customer experience with innovations like the Tiger Vault debit card in Singapore, which connects daily spending to stock ownership. The company also launched new trading features in Hong Kong, including overnight trading and cryptocurrency services, further enhancing its appeal to a broader range of investors. Overall, UP Fintech Holding Limited (NASDAQ:TIGR) strategic initiatives, coupled with its efficient operations and growing user base, underscore its potential for continued financial performance and market presence.
During Q2, 2024 the count of hedge funds holding positions in UP Fintech Holding Limited (NASDAQ:TIGR) fell to 8 from 13 in the prior quarter, as reported by Insider Monkey’s database encompassing 912 hedge funds. These holdings collectively amount to around $14.31 million. D. E. Shaw’s D E Shaw emerged as the leading shareholder among these hedge funds during this timeframe.
05. LexinFintech Holdings Ltd. (NASDAQ:LX)
Number of Hedge Fund Holders: 10
LexinFintech Holdings Ltd. (NASDAQ:LX) operates a technology-driven platform that connects consumers with credit needs to financial institutions, primarily in China. Despite missing earnings expectations in Q1 2024, with an EPS of $0.17 compared to the expected $0.43, LexinFintech Holdings Ltd. (NASDAQ:LX) underlying fundamentals demonstrate potential for long-term growth. The company has implemented a cautious strategy in response to the challenging macroeconomic environment. This approach focuses on maintaining asset quality, reducing risk, and enhancing profitability. Notably, LexinFintech Holdings Ltd. (NASDAQ:LX) reported a 13.5% year-over-year increase in loan balances, reaching RMB 121.5 billion, alongside an 8.7% rise in revenue to RMB 3.2 billion. The firm’s net profit stood at RMB 202 million, supported by a stable net profit margin of 6.2%.
The company’s emphasis on risk management is evident in its efforts to improve the quality of newly issued loans while disposing of delinquent assets. This strategy is expected to yield better risk performance in the second half of the year. Additionally, LexinFintech Holdings Ltd. (NASDAQ:LX) has achieved a record-low funding cost, reducing it by 34 basis points to under 6%, further enhancing profitability. Analysts note that while LexinFintech Holdings Ltd. (NASDAQ:LX) asset quality improved in Q1 2024, its financial outlook is weak, with a projected -14.7% YoY drop in Q2 loan origination. Despite an attractive dividend yield of 10.2% for FY 2024, the company’s sluggish earnings growth justifies its low valuation. Consequently, according to analystst, a Hold rating is warranted. LexinFintech Holdings Ltd. (NASDAQ:LX) proactive measures, including a targeted customer acquisition strategy and an increased focus on high-quality assets, position the company for improved financial performance as market conditions stabilize. Despite near-term challenges, the company’s strong fundamentals and strategic initiatives provide a solid foundation for future growth, making it an attractive investment opportunity.
In the second quarter of 2024, there were 10 hedge funds holding positions in LexinFintech Holdings Ltd. (NASDAQ:LX), as compared to 12 in the previous quarter according to Insider Monkey’s database. The total value of these holdings is approximately $10.16 million. John Overdeck And David Siegel’s Two Sigma Advisors held the largest stake among these hedge funds during this period.
04. Tuya Inc. (NYSE:TUYA)
Number of Hedge Fund Holders: 10
Tuya Inc. (NYSE:TUYA) stands out as a leading innovator in the smart home and IoT industry, capitalizing on its advanced smart lighting solutions and the integration of generative AI technology. Founded in 2014, Tuya Inc. (NYSE:TUYA) has built a strong ecosystem that collaborates with a diverse range of brands and original equipment manufacturers (OEMs) to develop and deploy smart devices worldwide. Despite facing competition from tech giants like Google and Amazon, Tuya Inc. (NYSE:TUYA) strategic alliances and ongoing innovation make it resilient and well-positioned for growth. The company’s recent financial performance highlights this potential, with a remarkable 29.9% year-over-year revenue increase from $47.48 million in March 2023 to $61.66 million in March 2024. This growth is primarily driven by the IoT Platform-as-a-Service (PaaS) sector, which saw a 35.7% rise in revenues. Furthermore, Tuya Inc. (NYSE:TUYA) gross profit margin improved from 44.28% to 47.82%, reflecting its focus on high-margin products and cost efficiency.
Tuya Inc. (NYSE:TUYA) forward-looking approach includes the launch of a revolutionary smart lighting solution and plans to integrate generative AI into its smart devices by Q4 2024. These developments are expected to enhance user experience and drive demand for Tuya Inc. (NYSE:TUYA) products, potentially leading to an 18% revenue growth in the coming year. Analysts believe that Tuya Inc. (NYSE:TUYA) innovative edge and strategic partnerships will allow it to maintain a competitive position in the rapidly evolving IoT market.
Tuya Inc.’s (NYSE:TUYA) strong financial performance, cutting-edge technological advancements, and strategic market positioning make it a compelling investment opportunity with significant growth potential. The company’s ability to innovate and adapt in a competitive landscape supports a bullish outlook for its future prospects.
The number of hedge funds in Insider Monkey’s database owning stakes in Tuya Inc. (NYSE:TUYA) fell to 10 in Q2 2024, from 11 in the preceding quarter. The consolidated value of these stakes is nearly $6.38 million. Among these hedge funds, Lei Zhang’s Hillhouse Capital Management was the company’s leading stakeholder in Q2.
03. Lufax Holding Ltd (NYSE:LU)
Number of Hedge Fund Holders: 11
Lufax Holding Ltd (NYSE:LU) operates a technology-driven personal financial services platform, offering personal lending and wealth management solutions. Founded in August 2005 and headquartered in Shanghai, China, Lufax Holding Ltd (NYSE:LU) is well-positioned to capitalize on its robust financial foundation and attractive dividend yields. Lufax Holding Ltd (NYSE:LU) remains an appealing investment due to its strong fundamentals and promising outlook.
The company’s recent Q1 2024 results highlight positive trends in its loan-related metrics, signaling an inflection point in new loan volume growth, with a +2% increase quarter-over-quarter after seven consecutive quarters of contraction. This growth reflects Lufax Holding Ltd (NYSE:LU) strategic shift toward higher-quality assets, supported by a favorable loan mix that increasingly focuses on consumer finance. The share of consumer loans in Lufax Holding Ltd (NYSE:LU) total new loans has surged from 24% to 42% year-over-year, demonstrating the company’s successful diversification away from its core small business owner segment.
Moreover, Lufax Holding Ltd (NYSE:LU) rising take rate, which improved from 7.3% in Q4 2023 to 9.0% in Q1 2024, underscores the company’s ability to generate higher returns from its loan portfolio. This is bolstered by the company’s “100% guarantee model,” which commands a significantly higher take rate of around 14%. As this model gains a larger share of the loan portfolio, Lufax Holding Ltd (NYSE:LU) overall take rate is expected to continue rising, further enhancing its profitability. Lufax’s dividend outlook is equally compelling, with projected forward yields of 8.2% and 8.7% for FY 2025 and FY 2026, respectively. These conservative estimates suggest that the company’s actual dividend distributions could exceed expectations, especially if Lufax leans towards the higher end of its 20%-40% payout guidance. Despite short-term challenges like withholding tax impacts from a special dividend, Lufax is poised for solid revenue growth and healthy margins in the coming years.
Trading at a consensus forward FY 2025 P/E ratio of just 3.3x, Lufax Holding Ltd (NYSE:LU) offers substantial upside potential as its valuation could re-rate higher, given its strong dividends and improving financial metrics. This makes Lufax a compelling Buy for investors seeking value and income in the personal financial services sector. In the second quarter of 2024, there were 11 hedge funds holding positions in Lufax Holding Ltd (NYSE:LU), as compared to 17 in the previous quarter according to Insider Monkey’s database. The total value of these holdings is approximately $34.38 million. Christopher Wang’s Yunqi Capital held the largest stake among these hedge funds during this period.
02. iQIYI, Inc. (NASDAQ:IQ)
Number of Hedge Fund Holders: 17
iQIYI, Inc. (NASDAQ:IQ), a leading player in China’s video streaming market, presents an intriguing investment opportunity despite recent mixed signals. The company’s strategic adjustments and focus on long-term growth underscore its potential for future gains. Although iQIYI, Inc. (NASDAQ:IQ) Q1 2024 revenue saw a decline of 5% year-over-year, the company’s shift in strategy towards long-term membership revenue is a positive development. By prioritizing higher-value, loyal subscribers over short-term metrics like subscriber count and Average Revenue Per Member (ARM), iQIYI, Inc. (NASDAQ:IQ) is positioning itself to enhance its revenue sustainability in the long run. This approach is expected to attract more dedicated subscribers and potentially boost revenue quality.
Additionally, iQIYI, Inc. (NASDAQ:IQ) operating margin of 11.9% in Q1 2024 exceeded market expectations, highlighting the effectiveness of its cost management strategies. The company’s commitment to optimizing marketing expenses and reducing content costs through AI integration demonstrates its proactive approach to enhancing profitability. This focus on operational efficiency is likely to yield further improvements in profit margins, driving overall financial performance.
Despite facing competition from rapidly growing short-form video platforms, iQIYI, Inc. (NASDAQ:IQ) strategic investments in content and technology are poised to strengthen its market position. The company’s ability to adapt and innovate, coupled with its disciplined approach to cost control, sets the stage for continued profitability growth. iQIYI, Inc. (NASDAQ:IQ) current challenges are outweighed by its strategic focus on long-term revenue growth and operational improvements. The stock’s valuation, with a P/E ratio of 8.6, appears attractive given the company’s potential for future profitability gains.
The number of hedge funds in Insider Monkey’s database owning stakes in iQIYI, Inc. (NASDAQ:IQ) grew to 17 in Q2 2024, as compared to 15 in the preceding quarter. The consolidated value of these stakes is nearly $148.21 million. Among these hedge funds, Thomas Steyer’s Farallon Capital was the company’s leading stakeholder in Q2.
01. Gaotu Techedu Inc. (NYSE:GOTU)
Number of Hedge Fund Holders: 18
Gaotu Techedu Inc. (NYSE:GOTU), a prominent player in the technology-driven education sector, has shown strong growth and operational resilience in its Q1 2024 results. The company was founded by Xiang Dong Chen in June 2014 and is based in Beijing, China. The company’s net revenue surged by 33.9% year-over-year to RMB946.9 million, driven by robust product innovation and expanding market reach. Gross billings also climbed 35.3% year-over-year to RMB729.4 million, reflecting Gaotu Techedu Inc. (NYSE:GOTU) increasing market penetration and enhanced customer base.
A significant factor bolstering Gaotu Techedu Inc. (NYSE:GOTU) outlook is the recent relaxation in Chinese regulations for after-school tutoring. The Chinese government, having previously imposed stringent restrictions, has begun to reverse its stance amid rising youth unemployment and economic challenges. This policy shift is expected to benefit major players like Gaotu, which has already demonstrated strong performance in its non-academic tutoring segment. In Q1 2024, over 75% of Gaotu’s revenue came from non-academic services, reflecting a 35% increase year-over-year and showcasing the sector’s growth potential.
Gaotu Techedu Inc. (NYSE:GOTU) financial health is robust, with substantial cash reserves of RMB3.8 billion supporting ongoing investments in educational content and service enhancements. The company’s diverse educational offerings, including new offline learning centers and comprehensive services, enhance its competitive edge and market position.
Looking forward, Gaotu Techedu Inc. (NYSE:GOTU) growth prospects are promising. The company’s strategic investments and policy tailwinds are expected to drive sustained revenue and profitability. The recent regulatory changes provide further upside potential for Gaotu Techedu Inc. (NYSE:GOTU) stock price, positioning it as a compelling investment opportunity despite inherent risks such as regulatory fluctuations and demographic shifts.
In the second quarter of 2024, the number of hedge funds with stakes in Gaotu Techedu Inc. (NYSE:GOTU) increased to 18 from 17 in the previous quarter, according to Insider Monkey’s database. The combined value of these stakes is approximately $72.22 million. Run Ye, Junji Takegami And Hoyon Hwang’s Tiger Pacific Capital emerged as the largest stakeholder among these hedge funds during this period.
While we acknowledge the potential for GOTU to grow, our conviction lies in the belief that some 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 NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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