We recently compiled a list of the 7 Cheap Chinese Penny Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Gaotu Techedu Inc. (NYSE:GOTU) stands against the other cheap Chinese penny stocks.
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.
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).
A line of students working on their computers in an after-school tutoring center.
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.
Overall GOTU ranks 1st on our list of the cheap Chinese penny stocks to buy. While we acknowledge the potential for GOTU as an investment, 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 GOTU 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.
