We recently published a list of 12 Cheap Chinese Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Alibaba Group Holding Limited (NYSE:BABA) stands against the other Cheap Chinese stocks to buy.
Trump’s Back and China’s Stimulus Lags
Trump is back as the President of the United States and China’s stimulus plans have let down investors, which has created more economic uncertainty regarding China. China is trying to fix its economy and Trump’s comeback to the White House means steep tariffs for Chinese-made goods. In his first term, President-elect Donald Trump imposed tariffs up to 25% on Chinese goods, initiating a trade war between two global giants. Trump’s second stint in the office is expected to imply tariffs as high as 60% on Chinese-made goods.
On the other hand, China’s stimulus of $1.5 trillion or nearly 10 billion yuan to back its economy doesn’t seem to appeal the investors. China’s stimulus has come at a time when the economy is struggling badly and there are potential tariff threats from the new U.S. administration. In addition to that, overseas companies are drawing their money out of China as the growth outlook seems gloomier. In the first nine months of 2024, foreign direct investment (FDI) slid nearly $13 billion. According to China’s Administration of Foreign Exchange, the FDI outflows exceeded $8.1 billion in Q3, potentially leading to a net FDI outflow for the first time since 1990. This shows that investors are still pessimistic regarding China’s economic reforms aimed at stabilizing growth.
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Other Problems with the Chinese Economy
The consumer price inflation (CPI) in October eased to 0.3% year-over-year compared to an expected 0.4%, while the producer price index (PPI) dropped by 2.9% year-over-year in October, slightly widening from the 2.8% decline observed in September 2024. Following the U.S. elections and China’s lower-than-expected inflation outcome, UBS has lowered China’s 2025 GDP growth estimate to 4% from the 4.5% it made in October. The Swiss Bank anticipates the GDP growth for 2026 to be also considerably lower.
What Could Happen in the Short-Term and the Long-term?
With Trump’s victory and the news regarding sparking expectations of steep tariffs, U.S. importers are expected to rush to front-load goods from China before the Presidential inauguration in January 2025. This could potentially lead to cost increases and deliver a surprising push to Chinese exports.
In the long run, analysts expect Trump’s tariff policy’s impact on the Chinese economy would be modest. However, the additional tariffs could hit exports and lead to a higher fiscal deficit or currency depreciation for China. Economists at Capital Economics project that the direct impact of large U.S. tariffs on China would be less than 0.5% of its GDP. The reason for this can be exporters finding alternative routes via other countries and also receiving support from depreciation of the yuan.
The Hang Seng Index has plunged more than 4% over the last five days, as of November 15, while the CSI 300 index has plummeted by nearly 2.50% in the last five days and is up by almost 3% in the last month. We can see the mixed reaction of the market considering the recent events.
With that, let’s take a look at Alibaba Group Holding Limited (NYSE:BABA) and what’s up with the Chinese stock.
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Our Methodology
To find the 10 Cheap Chinese Stocks to Buy According to Hedge Funds, first, we used stock screeners and shortlisted Chinese stocks listed on US exchanges with a market capitalization of more than $1 billion and a forward P/E ratio of less than 15, as of November 15. We narrowed down our selection to 10 stocks that were the most widely held by institutional investors and ranked them in ascending order of the number of hedge funds that have stakes in them, as of Q2 of 2024.
Why do we care about what hedge funds do? 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).
Alibaba Group Holding Limited (NYSE:BABA)
Number of Hedge Fund Holders: 91
Forward P/E Ratio: 10.88
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.
Alibaba improved its revenue growth from 2% in fiscal 2023 to 8% in fiscal 2024 and the same is expected for fiscal 2025. One major development with BABA has been that it has started paying dividends and has a dividend payout ratio of 11.70%. This shows that the Chinese giant is flexible in giving away some of its earnings to investors.
On October 10, Alibaba Group Holding’s Tmall shopping platform’s new brand increased by 239% from August to September, as reported by the South China Morning Post. In the third quarter, Tmall’s new brand openings increased by 70% from the previous quarter. On November 12, Taobao and Tmall Group saw a record number of active buyers, while the company’s peer JD.com reported over 20% increase in the number of shoppers from a year ago. This shows that the consumer market is improving considering the economic slowdown.
Investors are not much pleased with the government stimulus and the Chinese companies have plunged following an initial pump after the stimulus news. Alibaba has a net revenue CAGR growth of 32.38% from 2013 and 2023, which shows that BABA is well-positioned in the market. BABA is trading 10.88 times its forward earnings, which represents a 40% discount to the sector median of almost 18.
Overall, BABA ranks 1st on our list of cheap Chinese stocks to buy 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.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.
