In this article, we will look at the 7 Most Promising Chinese Stocks According to Hedge Funds.
China’s New Economic Plan
The Chinese stock market shows compelling signs after announcing that Asia’s largest economy is “fully confident” of achieving its full-year growth target. After reaching the highest levels in over two years at the open, the Heng Seng index closed 9.40% lower in the trading session of October 8. The downward trend during the last trading session recorded the heaviest fall for Heng Seng since 2008. The week-long bull rally was backed by stimulus leading to positive economic sentiment regarding the Chinese full-year growth target, however, the market turned red after officials failed to persuade confidence in economic plans intended to revive the economy.
During the last week of September, the Chinese government unveiled the country’s most comprehensive economic rescue effort since the end of the COVID-19 pandemic. Pan Gongsheng, the governor of the People’s Bank of China, said that commercial banks will soon be advised to lower the interest rate of existing mortgages by nearly 0.5 percentage points on average. In addition, the People’s Bank of China (PBOC) reduced the rate on 300 billion yuan worth of one-year medium-term lending facility (MLF) loans to 2% from 2.30%. The rate cuts are part of the policy framework to effectively influence market borrowing costs and align with global economic activities.
On October 8, Reuters reported that Economic Planner Chairman, Zheng Shanjie pointed out that China is ‘fully confident’ of achieving economic targets for 2024 and would propose 200 billion yuan for investment projects during the next year’s budget plan. The IMF’s revised expected economic growth for China is now 5% for 2024 and 4.5% for 2025.
What are Most Analysts Saying About China’s Economic Plan?
Billionaires such as David Tepper, founder of Appaloosa Management, have expressed bullish sentiment on China, while most analysts are cautious about the potential risks China holds. John Rutledge, Safanad’s Chief Investment Strategist, said that China is trying to reach its 5% growth target but they are not going to make it. Rutledge highlighted some serious issues China is currently facing, especially the real estate crisis. Rutledge further added that pay offers are going down and home prices are down by 5%, the biggest decline since 2015. Chinese President Xi Jinping will continue teasing the investors as they invest their capital and then let them drive away and that’s what they are doing right now, added Rutledge. The Chinese stock market is currently experiencing a similar reaction and that’s what happened with the Heng Seng index on October 8.
China has reduced the down payment ratio for second homes from 25% to 15% as the first home. Pan Gongsheng said the policy is expected to benefit 50 million households and more than 150 million people, leading to a reduction of the nation’s total interest bill by over 150 billion yuan annually. However, analysts are stating that these are tiny measures of a bigger problem that Chinese real estate is facing.
On September 25, VOA reported that a real estate analyst in Taipei told the media outlet that the policy may not help restore confidence for Chinese home-buyers. China’s bigger problem is its deteriorating birth rate. The analyst said that young people who will inherit a house from elders will not invest in the housing market, due to a sluggish economy and not willing to take such a risk. In addition, Francis Lun, CEO of Geo Securities in Hong Kong, pointed out the policies are ‘too late and too few’ but are better than nothing.
Whereas, billionaire David Tepper is excited to make investments in Chinese stocks. In an interview on CNBC on September 26, Tepper stated that he is increasing his exposure to Chinese stocks, considering the stimulus as China plans to float $142 billion of capital into top state-owned banks. Tepper’s take on the new policy to boost the economy is a signal to invest in Chinese markets. As a result, he is “buying everything” related to China.
China’s struggling economy and the government’s effort to stimulate its property market is a move toward balancing its economy. The exposure of investors such as David Tepper to Chinese stocks and ETFs reflects investors’ confidence in a risky market with growth potential. With that in context, let’s take a look at the 8 most promising Chinese stocks according to hedge funds.
An expansive view of the cityscape, showing the impact of the company’s activities in China.
Our Methodology
For this article, to compile our list of the most promising Chinese stocks according to hedge funds, we used the Finviz stock screener and shortlisted the top 20 Chinese stocks with the highest market capitalization. From this dataset, we selected the top 8 stocks most favoured by hedge funds and ranked them in ascending order based on the number of hedge funds holding stakes in these firms as of Q2 2024.
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).
8 Most Promising Chinese Stocks According to Hedge Funds
8. NetEase, Inc. (NASDAQ:NTES)
Number of Hedge Fund Holders: 35
NetEase, Inc. (NASDAQ:NTES) is a leading Chinese firm that operates in various digital entertainment sectors, such as gaming, education, and e-commerce. The company has various divisions including, Games and Related Value-Added Services, You Dao, Cloud Music, Innovative Businesses, and Others. NetEase’s gaming division is one of the top players in the industry, with a portfolio of more than 100 game products and strategic collaborations with leading gaming firms, including Blizzard. The company also provides games licensed from external game creators.
NetEase (NASDAQ:NTES) has a strong pipeline of new game releases, with several recent launches that obtained positive gaming reviews. In July, NetEase launched Naraka: Bladepoint Mobile in China and received positive feedback from the gaming community. Another popular game, Marvel Rivals is now available on prominent gaming platforms, including PlayStation 5, Xbox Series X|S, and PC, expanding NetEase’s reach in the gaming market.
Polen Emerging Markets Growth Strategy stated the following regarding Net Ease, Inc. (NASDAQ: NTES) in its first quarter 2024 investor letter:
“NetEase, Inc. (NASDAQ:NTES) is one of the top players in China’s video game industry and saw decent revenue growth in 2023, particularly in its games division, with profit growth close to 20%. The stock also continues to recover after gaming restrictions announced last quarter in China were not nearly as bad as first feared.”
As of Q2 2024, Net Ease, Inc. (NASDAQ: NTES) was held by 35 hedge funds with a total stake of $993.75 billion.
7. New Oriental Education & Technology Group Inc. (NYSE:EDU)
Number of Hedge Fund Holders: 37
New Oriental Education & Technology Inc. (NYSE:EDU) is a top provider of private educational services in China, including test preparation, tutoring, K-12 education, vocational training, and language training. The company has grown and developed itself as a trusted brand in the Chinese education market.
New Oriental Education & Technology faces regulatory pressures and the need to innovate to stay ahead of soaring competition. Despite the risks, New Oriental Education & Technology (NYSE:EDU) has recorded a robust growth phase, with a net income of $309.5 million for the twelve months ending May 31, 2024, reflecting a rise of 74.57% year-over-year and a 5-year net income compound annual growth rate (CAGR) of 5.39%. Full-year revenue was up 43.9% year-over-year to $4.31 billion. The growth was mainly driven by an increase in the number of schools and learning centers, which soared by 114 and 277, respectively. The total number of schools and learning centers has reached 1025.
New Oriental Education & Technology Inc. (NYSE:EDU) is mainly focusing on its new business initiatives such as non-academic tutoring, intelligent learning systems and devices, study tours and research camps, educational materials and digitalized smart study solutions, and exam preparation courses designed to help students with junior college diplomas to obtain bachelor’s degrees. The company is also exploring business opportunities in the culture and tourism market. The company’s expansion into new educational business initiatives has been the catalyst behind the 43% increase in revenue in 2024.
In August, the company reported that it intends to consider additional dividend distributions in the future, in addition to the share repurchase program increased from $400 million to $700 million. The upsized share repurchase program is effective through May 31, 2025.
New Oriental Education & Technology Inc. (NYSE:EDU) is currently rated as a Buy, with analysts maintaining an average price target of $95.60, implying a 28.38% upside potential from current levels.
6. Baidu, Inc. (NASDAQ:BIDU)
Number of Hedge Fund Holders: 42
Baidu, Inc. (NASDAQ:BIDU) is a Chinese tech giant that runs the largest internet search engine in China. The company generates most of its revenue from advertising and search. Baidu also offers online marketing services such as pay-for-performance and auction-based services. The company is now focusing on AI business, with a strong emphasis on autonomous driving technology.
Baidu’s (NASDAQ:BIDU) management is fully focused on AI and is confident that it will be a key driver for the company’s growth in the future. Moreover, Baidu’s AI cloud services are also experiencing rapid growth. Being a leader in search engines and now adding AI to it along with diversification in autonomous vehicles is a huge plus for the company. The company’s autonomous vehicles through the Apollo project have garnered significant attention. The company’s Apollo Go ride-hailing service positions it to capitalize on this growing market. According to Fortune Business Insights, the autonomous driving market is forecasted to grow, with a CAGR of 32% over the next six years, reaching nearly $39 billion by 2030.
Baidu, Inc. (NASDAQ:BIDU) plans to deploy 1,000 RT6 robotaxis in Wuhan by the end of 2024. Whereas, the company’s latest RT6 model, at $27,500 costs half the price of its previous vehicles. Moreover, Baidu’s Apollo Go Robotaxi also costs half compared to conventional ride-hailing services.
For the twelve months ending June 30, Baidu (NASDAQ:BIDU) has experienced significant growth, with a net income of $2.70 billion, up by 24.44% from a year ago.
5. KE Holdings Inc. (NYSE:BEKE)
Number of Hedge Fund Holders: 43
KE Holdings Inc. (NYSE:BEKE) is a leading Chinese firm that operates an integrated online and offline platform for housing transactions and services. The company operates through its platforms including, Beike and Lianjia. Beike is its integrated online and offline platform for housing transactions and services, while Lianjia is a real estate brokerage branded store. The company also owns the Deyou brand for connected brokerage stores and other brands. The company operates 8,000 offices in China and manages over 500,000 rental apartments.
Despite a record real estate crisis, KE Holdings Inc. (NYSE:BEKE) has enhanced its market share in both existing and new home markets. The company’s success is mainly driven by its Agent Cooperation Network (ACN), which standardized transactions and promoted agent cooperation. In addition, the company’s trusted brand, Lianjia is one of the most authentic platforms for property listings.
During the second quarter of 2024, KE Holdings Inc. (NYSE:BEKE) exceeded earnings and revenue estimates. The company posted earnings per share of $0.22, beating consensus estimates by $0.11 per share. The revenue was reported at $3.26 billion, surpassing estimates by $172.98 million and a year-over-year growth of 19.9%.
The impressive results were fueled by an increase in its current home transaction services and the growth of its home renovation and rental divisions. The income from current home transactions was around $1 billion, experiencing a 14.3% year-over-year increase, while the income from home renovation and furnishing services soared by more than 53% to $600 million.
KE Holdings Inc. (NYSE:BEKE) is one of the most promising Chinese stocks and had a forward P/E of 21.49, trading at a discount of 41.50% to its sector median. As of the end of the second quarter, 43 hedge funds tracked by Insider Monkey held stakes in the company.
Baird Chautauqua International and Global Growth Fund stated the following regarding KE Holdings Inc. (NYSE:BEKE) in its Q3 2024 investor letter:
“KE Holdings Inc. (NYSE:BEKE) reported better-than-expected results this year, but its valuation was depressed due to pessimism toward the property market in China. Recently announced stimulus measures in China and specific measures for its property market have somewhat reduced the extreme pessimism seen earlier in the year.”
4. Trip.com Group Limited (NASDAQ:TCOM)
Number of Hedge Fund Holders: 52
Trip.com Group Limited (NASDAQ:TCOM) is a leading Chinese online travel agency that offers a wide range of booking services for hotels, transportation, tours, and corporate travel. The company has a significant global presence, with over 30,000 employees based in 95 locations in China and 22 international branches. On September 10, Trip.com reported that it was named the “Fast-Growing Brand” in the Interbrand Best China 2024 list, as the company continues to grow and seek innovation.
Trip.com is shaping the travel industry through its AI-powered solutions and its strategic focus on enhancing the customer journey. On September 4, the company announced a new product matrix for its corporate travel management brand, Trip.Biz. Through AI, Trip.Biz is transforming human-centric technology to deliver All-in-One digital solutions. The updated product matrix includes six core products including, Trip.Biz OBT & App, Trip.Biz Reporting, Trip.Biz Payment, Trip.Biz Desk, Trip.Biz ESG, and Trip.Biz Care.
During the second quarter of 2024, Trip.com Group Limited (NASDAQ:TCOM) reported a revenue of $1.74 billion, surpassing estimates by $8.73 million. The company has grown its net income at a compound annual growth rate (CAGR) of 49.52% over the past five years. This strong growth reflects the company’s dominance and ability to adapt to changing market conditions.
In the last quarter, the company observed that new flight routes have more than doubled search volumes compared to corresponding destinations. Similarly, inbound travel to China has seen remarkable growth in the first half of 2024, a rise of over 150% year-over-year. In Q2 2024, Trip.com’s hotel reservations by Chinese travelers increased by approximately 20% year-over-year, reflecting an enduring interest.
Trip.com Group Limited (NASDAQ:TCOM) is well-established in China and is expanding its international operations, which offer significant growth prospects. According to Mordor Intelligence, China’s tourism and hotel market is anticipated to grow at a CAGR of 5.53% from 2024 to 2029, reaching a value of $504.22 billion. The increasing tourism and hotel market shows that Trip.com has a large market to capture and the company is yet to benefit from this increasing market.
3. JD.com, Inc. (NASDAQ:JD)
Number of Hedge Fund Holders: 59
JD.com, Inc. (NASDAQ:JD) is a top Chinese e-commerce company, specializing in retailing consumer electronics, apparel, and household products. The company also operates other segments including, logistics, marketing services, and property classifieds, as well as other innovative technology initiatives.
JD.com, Inc. (NASDAQ:JD) is expanding its third-party merchant platform with significant investments and aims to achieve a more optimized product mix that will attract stronger revenue growth and increase profit margins. These developments show that JD.com is positioning itself for long-term success and competitiveness in the e-commerce market, underlining why JD is one of the most promising Chinese stocks.
The Chinese firm is utilizing cutting-edge technologies such as drones and AI to improve its logistics and supply chain capabilities. Ariel Investments stated the following regarding JD.com (NASDAQ:JD) in its first quarter 2024 investor letter:
“We initiated a position in China-based technology-driven E-commerce company, JD.com, Inc. (NASDAQ:JD). The brand has long been known across the region as a superior online shopping channel due to its unique first-party model and unparalleled fulfilment service underpinned by JD Logistics. Yet, a challenging macro environment drove shares lower as shoppers began seeking bargains. In response, the company made significant investments in elevating its third-party merchant platform to enhance its variety of product offerings and price competitiveness for consumers. We believe these actions will yield an improved product mix, stronger top-line growth, and margin expansion on a go-forward basis.”
JD.com, Inc. (NASDAQ:JD) has demonstrated exceptional financial growth, with a 5-year net income compound annual growth rate (CAGR) of 38.36%. During Q2 2024, the company exceeded earnings estimates by $0.47 per share, reporting an EPS of $1.14. The revenue was reported around $40.66 billion and surpassed estimates by $435.97 million.
JD.com is trading 10.75 times its forward-year earnings, which represents a 37% discount to the sector median of 17.14. The company’s earnings are expected to grow by more than 27% this year. This low forward P/E and anticipated increase in EPS shows JD is a cheap stock.
2. PDD Holdings Inc. (NASDAQ:PDD)
Number of Hedge Fund Holders: 86
PDD Holdings Inc. (NASDAQ:PDD) along with its peers, JD.com and Alibaba, is one of the most promising Chinese stocks. PDD Holdings is a global commerce leader with a range of business portfolios, including Pinduoduo and Temu.
The company is making major supply chain improvements and investing in supply chain efficiencies. PDD Holdings is partnering with high-quality merchants worldwide and working on customized fulfilment solutions to enhance its supply chain, considering the escalating competition in the e-commerce market. In addition, the company is prioritizing compliance as it continues to grow and penetrate in new markets globally. The company is currently operating businesses in over 79 markets worldwide. Over the past few quarters, the company has invested significant resources in building a safe shopping environment.
PDD’s revenue soared by 86% year-over-year to $13.4 billion in the second quarter of 2024, while reporting a strong operating profit of $4.5 billion. In September, PPD shares soared over 40% after China announced an economic plan to stimulate its economy.
PDD Holdings (NASDAQ:PDD) is considered one of the most undervalued stocks to buy right now. The company’s stock is trading 11.73 times its forward-year earnings, which represents a 31% discount to the sector median of 17.14. If the Chinese economy improves, which is expected to grow 5% this year, PDD’s growth could accelerate. PDD has an average price target of $168.08, indicating a potential upside of just under 18% from its current level. The stock has a consensus Buy rating from 36 analysts out of 47. As of the second quarter, 86 hedge funds held stakes in the company worth $8.10 billion.
1. Alibaba Group Holding Limited (NYSE:BABA)
Number of Hedge Fund Holders: 91
Alibaba Group Holding Limited (NYSE:BABA) is China’s largest e-commerce and cloud services company. The company also operates brick-and-mortar stores, logistics services, and digital media services. Once considered a high-growth bellwether of China’s economic growth, Alibaba suffered badly from the 2021 antitrust crackdown. However, BABA is rising again and has soared by 30% over the last year. The company improved its revenue growth from 2% in fiscal 2023 to 8% in fiscal 2024, the same expected for fiscal 2025.
Artisan Partners, an investment management company, has released its first quarter 2024 investor letter for the “Artisan Select Equity Fund.” Here’s what the fund had to say about BABA:
“Alibaba Group Holding Limited (NYSE:BABA) shares declined 7% during the quarter. There isn’t much new to say about Alibaba. There was no meaningful news that drove the share price decline. The earnings for the December quarter were fine, with revenues and profits both increasing 5%—not typically an exciting level of growth, but certainly enough to justify the company’s paltry valuation of 4X–5X EBIT. As we have written in recent letters, this is a valuation level that is normally reserved for a dying business, and Alibaba is not a dying business. Management continues to implement changes that are intended to increase shareholder value. Over the past year, they have changed management, adjusted the company structure, contemplated spinning off assets, made progress monetizing the balance sheet, and have improved the capital allocation. All of these actions have yet to be reflected at all in the share price. This is a stock that could double and would still be cheap.”
Alibaba Group Holding Limited’s sentiments have received a boost after the e-commerce giant announced plans to increase its service fees from merchants. The company plans to charge a 0.6% software service fee on transactions for sellers who list their products on Tmall and Taobao, starting September 2024. This news has been welcomed by investors as it is expected to boost the company’s core merchant revenue. In a research note, Jefferies analysts led by Thomas Chong highlighted that the 0.6% software service fee is viewed as a positive development as Alibaba Group Holding Limited (NYSE:BABA) earns most of its revenues from Taobao and Tmall.
On October 10, the South China Morning Post reported that Alibaba Group Holding’s Tmall shopping platform’s new brand increased by 239% from August to September. In the third quarter, Tmall’s new brand openings increased by 70% from the previous quarter.
Analysts expect Alibaba’s valuations to rise if investors go back towards China. Analysts project Alibaba Group Holding Limited (NYSE:BABA) to increase its revenue at a compound annual growth rate (CAGR) of 8% from fiscal 2024 to fiscal 2027. BABA is trading 12.26 times its forward earnings, which represents a 28% discount to the sector median of 17.14.
While we acknowledge the potential of Alibaba Group Holding Limited (NYSE:BABA) to grow, 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 BABA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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