We recently published a list of 8 Most Promising Chinese Stocks According to Hedge Funds. In this article, we are going to take a look at where Alibaba Group Holding Limited (NYSE:BABA) stands against other most promising Chinese stocks.
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.
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).
An e-commerce platform displaying a wide range of products to customers online.
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.
Overall, BABA ranks 1st on our list of most promising Chinese stocks according to hedge funds. While we acknowledge the potential of BABA 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 BABA 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.