Time to get bullish on China again? JP Morgan sees a buying opportunity in these 2 Chinese stocks
Chinese equities have come under pressure for a variety of reasons over the past year and a half or so; the slowing economy has been one of the causes, while national wrangles with regulators have not helped either, especially for those in the tech sector. The fear of delisting of Chinese stocks listed in the United States is another element that keeps sentiment low and has an impact on performance. This is because Chinese companies do not meet US auditing standards. But the prospect of delisting might be less likely now.
An agreement has been signed by the China Securities Regulatory Commission and the US Public Company Accounting Oversight Board stating that the duo will work together to inspect the audit working papers of Chinese companies listed in the US. This could potentially avoid the withdrawal from US stock exchanges of 261 Chinese companies with a combined market capitalization of around $1.3 trillion.
So, is it time to get bullish on Chinese stocks again? Analysts at banking giant JP Morgan certainly think a pair of Chinese names deserves closer scrutiny right now. And what about the rest of the street? With the help of the TipRanks platform, we can also gauge the sentiment of other experts. Let’s dive into it.
We’ll start with Chinese internet giant Baidu. How much of a giant? It is the world’s third-largest search engine with strong market share dominance in China, far surpassing the global leader Google. Baidu’s search engine business is its daily bread, but it’s also a technology innovator and leader in artificial intelligence (AI). In addition to its Baidu Maps mapping service, it provides 57 research and community services, such as the Baidu Wangpan cloud storage service and the Baidu Baike online encyclopedia. In 2007, Baidu became the first Chinese company to earn a spot on the NASDAQ-100 index.
So, it’s not minnows we’re talking about here, as evidenced by its latest quarterly report – for 2Q22. Revenue may have fallen 5% year-over-year to ‘just’ $4.43 billion due to the economic downturn, but the figure still tops the consensus estimate of $4.20 billion .
The profitability profile received a real boost thanks to a significant margin expansion of 500 basis points – from 17% in the first quarter to 22% in the second quarter. This led to a complete beatdown on the baseline as a wo. earnings per ADS of $2.36 fared much better than the $1.63 expected on Wall Street.
The performance was applauded by JP Morgan’s Alex Yao who thinks it’s time for a change of tone on the title. Following the posting of Q2, Yao upgraded BIDU’s rating from Neutral to Overweight (i.e. Buy). Yao’s price target stands at $200, leaving room for a stock appreciation of around 42% over the coming year. (To see Yao’s record, Click here)
Explaining his bullish stance, Yao writes, “We believe there is a consensus benefit from an extrapolation of beaten margin in the next 2 quarters due to positive operating leverage (sequential ad recovery) and cost optimization, especially on traffic acquisition and content costs. We highlight the potential break-even point of AI Cloud in the next 2-3 years as BIDU selectively focuses on the most profitable verticals that could offset lower ASD (Apollo self driving) margins as the contribution takes effect from late 2023… We expect upward revisions to earnings estimates , which in turn should drive up the stock price.
Most on Wall Street share Yao’s bullish sentiment; Of 14 recent analyst reviews, 13 are positive, making it a consensus strong buy rating. The average lens is slightly higher than Yao’s; at $207.71, investors are eyeing a 47% 12-month upside. (See Baidu’s stock forecast on TipRanks)
Future Holdings (FUTURE)
Now let’s take a look at the Chinese online brokerage platform Futu. The company is a market leader in online brokerage services in China, and in addition to digital brokerage, through its Futubull and moomoo platforms, the company offers online wealth management services. These offer access to mutual funds, private funds, and bonds, while also providing market data. Renowned for its social features, the platform offers users a network that connects them with companies, analysts, other investors and key opinion leaders.
With China being such a huge market, there is huge potential for growth, but being a fintech company, it is also exposed to the whims of the Chinese regulator.
It is certainly a risk, but nevertheless, revenues have been increasing steadily for the past 3 quarters. Second quarter results are fresh out of the oven and show $222.6 million in revenue, a 9.6% year-over-year increase.
The total number of paying customers increased 38.6% year-on-year to 1.39 million, while the total number of users increased 20% from the same period last year to 18, 6 million. Ultimately, the GAAP EPADS of $0.57 came in just ahead of the $0.56 expected on Wall Street.
Assessing the print, JP Morgan’s Katherine Lei applauds the “good business performance”, with several factors informing her positive view.
“First, “says the analyst,” Futu’s 2Q22 results exceeded expectations thanks to stable customer growth, market share gains and a higher mixed commission rate. Second, regulators in the US and China have signed an agreement to cooperate in inspecting Chinese ADR inventory, which we believe partially mitigates the risk of delisting. Third, our Chinese internet analyst Alex Yao expects Chinese internet stocks to generate further earnings in Q3.
As far as Lei is concerned, the results deserve an upgrade; the rating changes from neutral to overweight (i.e. buy), while the price target is pushed higher – from $55 to $62. The implication for investors? More than 28% from current levels. (To see Lei’s track record, Click here)
Moving on to the rest of the street, where 3 more analysts support Lei’s position, and with the addition of 1 Hold and Sell, each, the stock boasts a Moderate Buy consensus rating. Based on the average target of $55.5, there is growth potential of around 14% over the coming year. (See Futu stock forecast on TipRanks)
To find great ideas for Chinese stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a recently launched tool that brings together all stock information from TipRanks.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.