We recently compiled a list of the 10 Best Chinese Stocks to Buy Right Now. In this article, we are going to take a look at where NetEase Inc (NASDAQ:NTES) stands against the other Chinese stocks.

Nearly every major equity market is up for the year owing to improved investor sentiments. However, it is an exception for Chinese equity markets that continue to underperform while hovering near the zero-COVID lockdown valuations of three years ago.

Over the past three years, about $6 trillion has been wiped off the value of Chinese stocks.  The global index compiler MSCI has already announced plans to remove up to 60 Chinese stocks from its gauges as it responds to the underperformance of recent years. The cut will signify the waning need and demand for some of the country’s equities to overseas investor’s portfolios. Amid the cuts, the index will still keep hold of some of the best Chinese stocks to buy now.

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The underperformance comes amid growing concerns about the Chinese economy, which continues to send jitters to the investment community.  The Chinese economy has always outperformed the US economy, increasing by 123%  between 2012 and 2022, compared to 58% for the US.

Nevertheless, the Chinese economy has struggled in recent years amid a myriad of problems, including a downturn in the real estate sector, deflation, high debt levels, and a shift in ideology-driven policies that are scaring away foreign firms from the economy.

While the economy grew by 5.2% last year, much higher than 2.5% for the US, it was the lowest pace of growth since 1990, with the exception of the pandemic period. While economists expected the economy to slow even further in 2024, with growth averaging 4.5%, it has started showing signs of recovery. The Chinese economy grew 5.3% in the first quarter and 4.7% in the second quarter.

Nevertheless, the 4.7% growth in the second quarter, while reasonable, is far below the country’s double-digit growth rates in the past decades, which is a major point of concern in the equity markets. On the other hand, the slowdown in economic growth is not the only headwind that scares investors from the Chinese economy.

Deteriorating US-China relations has always rattled investors’ sentiments. With the US hitting Chinese firms with trade tariffs and restricting access to some key technologies, China has also hit back with its fair share of tariffs. The tariff hike on Chinese electric vehicles from 25% to 100% and the imposition of trade tariffs on $18 billion worth of imports underline the ever-deteriorating relations between the two economic powerhouses.

Amid the deteriorating macroeconomics, Chinese stocks have started showing signs of recovering in the second half of the year. Some of the promising sectors include the fixed asset investments sector, which is driven by faster manufacturing and infrastructure investment. Additionally, industrial production and services are also on the rise while playing host to some of the best Chinese stocks to buy.

In July, global hedge funds added holdings of some of the best Chinese stocks to buy now as most took advantage of their depressed valuations after steep pullbacks. Nevertheless, the hedge fund positions holdings remain near a five year low.

Additionally, analysts at BCA Research believe Chinese equities could insulate fund managers from deep losses as global risk assets face fresh dangers. The firm has already upgraded Chinese onshore equities to overweight from neutral.

“We expect Chinese stocks to fall by less than or as much as their global and EM peers in a bear market,” analysts, including chief China strategist Arthur Budaghyan, said in the report. Potential market support from Chinese state-owned funds could temper potential declines, he added.

As the economic situation in China improves and sentiments in the equity market improve, now could be the best time to pay close watch to the best Chinese stocks to buy, likely to outperform heading into year-end.

Our Methodology

To compile the list of the 10 best Chinese stocks to buy now, we scanned through the top 50 companies listed on the US stock exchange from the iShares MSCI China ETF. Analysts believe these companies have significant upside potential. Once we had a consolidated list, we ranked the best Chinese stocks in ascending order of their upside potential, as of August 17.

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).

NetEase Inc (NASDAQ:NTES)

Hedge Funds Holding Stakes: 35

Stock Upside Potential: 45.10%

NetEase, Inc. (NASDAQ:NTES) is a Chinese company involved in various digital entertainment sectors, such as online gaming, music streaming, and educational services over the web. The firm is structured into different divisions: Games and Related Value-Added Services, You Dao, Cloud Music, Innovative Businesses, and Others. NetEase, Inc. (NASDAQ:NTES) creates and manages games for PCs and mobile devices, in addition to providing games licensed from external game creators.

It stands out as one of the best Chinese stocks to buy, having returned 89% over the past five years; NetEase, Inc. (NASDAQ:NTES) experienced a compound earnings per share (EPS) growth rate of 24% annually. This EPS growth rate is notably higher than the annual increase in share prices, which stood at 12% throughout the same duration.

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.”

Currently, the stock is rated as a Buy with an average price target of $127.50, implying a 45.10% upside potential from current levels. In Q2 2024, there were around 35 hedge fund holders in the company, down from 41 in the previous quarter. Orbis Investment Management held the most prominent position in NetEase, inc. (NASDAQ:NTES) with 1.91 million shares worth $182.28 million.

Overall NTES ranks 8th on our list of the best Chinese stocks to buy. While we acknowledge the potential of NTES 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 NTES, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.