In some important respects, the Chinese economy has lagged behind the US in recent years. The country clung to anti-COVID lockdown policies much longer than most others, but after nearly three years of restrictions it has finally opened up. The result is a sharp increase in growth, according to recent data from the Chinese government.
The country’s GDP grew 4.5% in 1Q23, compared to 2.9% in 4Q22. One particular strength seen in the Chinese data was the 10.6% rise in retail sales for March. Weaknesses included industrial production, which missed the 4% forecast and came in at 3.9%.
But the big picture is one of growth, and Hui Shan, Goldman Sachs’ chief China economist, said in a recent interview: “[The] The data is in line with our bullish full-year view on China’s growth. That’s the kind of rebound after reopening. [and] it is at the core of why we have our above consensus forecast of 6% growth for the full year.”
Carrying this forward, Goldman stock analysts have been pointing out chinese stocks that they are likely to see gains in the US markets. And just as China’s economy is growing rapidly out of the COVID gate, these Chinese stocks show, in Goldman’s view, 50% or more upside potential over the next 12 months.
ZTO express (ZTO)
First under Goldman Sachs’ microscope is ZTO Express, a delivery company that has taken advantage of China’s fast-growing digital merchandising sector. Since its inception in 2002, ZTO has expanded its package delivery market share in China to more than 20%. The company has grown with the e-commerce industry in its home country and its growth as a delivery company specializing in online orders has in turn been an asset to online retailers. ZTO partners with some of China’s top online retail sites, including Alibaba and JD.com.
ZTO has driven its own expansion through its scalable network partner model. Partners typically handle first- and last-mile transportation, the end of the pickup and delivery chain, while ZTO works on sorting and line-haul operations. The model provides the company with operational efficiency and economies of scale, while controlling costs. The company is working to expand its network and has reported strong growth in parcel delivery volume in recent quarters.
As is typical of companies with close connections to retail, ZTO shows a predictable seasonal pattern in its quarterly earnings and revenue. The high point is usually the fourth quarter, the height of many holiday shopping seasons, followed by a dip in the first quarter. The last reported quarter was Q4 2022, and the company will report its Q1 2023 numbers next week, so a quick review of the previous quarter’s performance would be a good way to prepare.
In the last quarter of 2022, ZTO posted revenue of $1.43 billion, up 7.1% from the previous year. This result missed the forecast, by a little more than $20.4 million. Quarterly revenue was supported by strong growth in operations, including a 3.9% year-over-year increase in package volume to 6.593 million. ZTO had more than 31,000 outlets for pickup and delivery; 5,900 network members; 98 sorting centers; and some 11,000 own line transport trucks as of December 31, 2022.
In summary, ZTO reported a non-GAAP ‘earnings per US depository share’ (EPS) of 37 cents, or 1 cent below expectations. The company’s adjusted EBITDA reached $492.6 million, with a 24% year-over-year gain.
Goldman Sachs analyst Ronald Keung is optimistic about a rebound in China’s online economy, writing of this stock: “We upgrade ZTO to Buy from Neutral as we (1) expect its share-growth story to market picks up this year (we expect +1.5 ppt equity gain in FY23), (2) valuation looks attractive with 18X 23E ex-cash P/E along with 25% CAGR earnings growth, along with (3) its dual primary listing which management expects to complete this quarter, paving the way for its subsequent southbound listing.”
To this end, Keung gives ZTO shares a $42 price target, implying a 51.5% gain from current levels, along with his Buy rating. (To view Keung’s history, Click here)
Overall, all four of the recent analyst reviews on ZTO are positive, for a unanimous consensus Strong Buy rating. Shares are selling for $27.72 and the $33 average price target suggests a potential upside of 19% over the one-year time horizon. (See ZTO Stock Forecast)
iqiyi, inc. (IC)
Next on our list of Goldman’s China picks is iQiyi, China’s largest online streaming service. iQiyi was founded over a decade ago by Baidu and now has a leading market share in China’s video-on-demand.
Through its platform, the company offers a wide range of video programming to the Chinese market, including reruns of existing programming and in-house production. iQiyi has more than 50 production studios and has developed independent and serialized original programming. The company follows a subscription-per-service model, selling access to its video-on-demand library.
Viewers can choose between VIP or ad-supported subscription services, and thematic options range from drama series to old and new movies, variety shows and anime. The company offers localized language options and subtitles for easy viewing, and has a daily subscriber base of more than 100 million.
On the financial side, iQiyi went from quarterly net loss to net profit from 2021 to 2022. In the last quarter reported, Q4 2022, iQiyi posted a quarterly profit of 14 cents on a non-GAAP basis. This was a tremendous turnaround from the 32 cent loss in Q4 2021 and beat estimates by 7 cents.
Earnings were derived from a top line of $1.1 billion, which was down 8% year-on-year but $10 million above forecast. The company’s performance benefited from strong subscriber growth, which expanded from 97 million daily subscribers in 4Q21 to 101.01 million in 3Q22 to 111.6 million in 4Q22. The company will report its 1Q23 results on May 16.
As for Goldman’s view, we find analyst Lincoln Kong to be bullish on iQiyi’s prospects. He writes: “We believe 2023 remains the year for IQ to regain market share with accelerating revenue and sustained profitable growth… [We] expects IQ to deliver higher revenue growth than its peers in an industry with enhanced competitive dynamics, and is set to see accelerated fundamentals from a low base (for both time spent and subscription) beginning in June- July”.
These comments support Kong’s Buy rating on the stock and his $10-point price target toward 65% upside for the coming year. (To view Kong’s history, Click here)
Overall, there are 8 recent analyst reviews on record for IQ stock, including 7 Buys vs. just 1 Hold, giving the stock a Strong Buy consensus rating. The stock has an average price target of $9.41, indicating ~56% upside potential from the $6.05 ask price. (See IQ Stock Forecast)
Baidu, Inc. (BEGINNING)
Baidu has been described as the ‘Google of China’ as it is the largest online search engine platform on the Chinese-language Internet. Baidu, founded in 2000, has long diversified its business and is now also one of China’s leading AI companies. Baidu currently operates through two segments; the smallest is iQiyi, while the largest, Baidu Core, accounts for more than 70% of Baidu’s total revenue.
Baidu Core offers a variety of online marketing services as well as “non-commercial value-added” services. The company’s artificial intelligence initiatives power a set of growing business segments, including the Mobile Ecosystem application platform; the AI cloud; and Smart Driving.
Annual revenue last year was slightly lower than in 2021, going from $19.3 billion to $18.36 billion, or just under 5%. The company’s 1Q23 financial release is scheduled for May 16, but we can look back to the fourth quarter to see where it stands.
On the top line, quarterly revenue in 4Q22 came in at $4.8 billion, flat year-over-year, but $170 million above expectations. In summary, the company reported $2.21 in earnings per US depositary share, a figure that was up 31.5% from a year earlier and 16 cents better than forecast. Baidu demonstrated strong cash generation in the quarter, reporting free cash flow of $859 million, or $736 million with iQiyi’s contribution removed. As of the end of 2022, Baidu had a total of $26.87 billion in cash and liquid assets on hand.
We can check back with Lincoln Kong for Goldman’s view, who sees Baidu continue to win going forward. Kong writes of the stock: “Looking to 2023E, we believe Baidu is poised to accelerate revenue/profit growth in a better macro environment that benefits the ads and cloud business (from Q2 onwards), and Clearer visibility into ERNIE LLM monetization/traffic generation, and therefore expect 13% sales and core operational growth by 2023-24E. With shares trading at 14X 2023E PE and net cash representing more than 30% of market capitalization, we see continued favorable risk reward.”
Quantifying his position here, Kong rates BIDU a Buy, and his $186 price target indicates room for ~51% stock appreciation over the next 12 months. (To view Kong’s history, Click here)
Tech companies get a lot of attention from Wall Street, and Baidu has 13 recent analyst reviews on file. All of them are also positive, giving the stock its Strong Buy consensus rating. BIDU shares are trading at $123.43 and the $193 average price target implies ~56% upside from current levels. (See BIDU Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the noted analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.