China’s first-quarter economic growth was higher than expected at 6.9%, prompting investors to wonder if Chinese stocks were worth buying again.
The first quarter was the country’s best rate of growth since 2015. Most of the growth was from infrastructure and real estate-related investments while the service industry didn’t find things nearly as rosy.
“I think China should be directing the economy to slow down its growth in the long term … but on the contrary, growth is accelerating,” said Hidenobu Tokuda, a senior economist with Mizuho Research Institute in Tokyo. “This is good for now but it makes it difficult to see how China’s economic slowdown will land in the future. Uncertainties remain high.”
So, despite the upbeat report for the months of January through March, analysts and economists remain skeptical about future growth. Given the mixed reaction to the first-quarter 2017 growth figures, it makes sense for investors to focus on quality companies.
With that in mind, these are the seven best Chinese stocks to buy on renewed growth in the country.
Best Chinese Stocks to Buy: Alibaba (BABA)
Alibaba Group Holding Ltd (NYSE:BABA) founder Jack Ma is responsible for the biggest IPO in U.S. history. He continues to make all the right moves at the Chinese e-commerce behemoth, and investors are a big beneficiary of this leadership with BABA stock up 31% year to date through April 25.
Alibaba is moving beyond its core business of e-commerce into all kinds of different enterprises including the cloud, financial services, wealth management, digital entertainment and even brick-and-mortar retail.
Jack Ma wants to grab more of the consumer’s business; not just in China, but around the world. It also wants to give Amazon.com, Inc. (NASDAQ:AMZN) a run for its money in the cloud. Recently, I highlighted the reasons I believe the cloud will become a big part of Alibaba’s future revenue and profits.
If you can only own one Chinese stock, this is it.
Best Chinese Stocks to Buy: Huaneng Power (HNP)
In sports, there’s a saying that the best offense is a good defense. That’s why it can’t hurt when investing in Chinese stocks to include a utility company such as Huaneng Power International Inc (ADR) (NYSE:HNP), one of China’s largest power producers.
In the first quarter of 2017 Huaneng power plants in China and Singapore generated almost 96 billion kilowatts of power, 24.9% higher than in Q1 2016, selling each megawatt at the equivalent of $58.95.
The company had $16.4 billion and $1.2 billion in revenue and profits, respectively, in fiscal 2016, both lower than in the same period a year earlier as a result of lower power generation in China due to its slowing economy. It was the first drop in profits since 2011.
HNP stock fell 15.7% in 2016 and 32.1% in 2015 providing investors with a much lower stock price than in early 2015 when it was trading at a five-year high of $61.37. With China’s economy showing some life, its 10.7% dividend yield should be attractive to income investors.
Best Chinese Stocks to Buy: China Life Insurance (LFC)
China Life Insurance Co Ltd (ADR) (NYSE:LFC) is China’s largest insurance company. In fiscal 2016 its pre-tax profit declined 48.1% to $3.5 million on $78.5 billion in revenue despite a 17.6% increase in net premiums earned to $61.9 billion.
2016’s decline in profits was the first in four years due to lower investment income as a result of lower bond yields. However, since last October, the 10-year Treasury bond in China’s increased by 68 basis points to 3.34%. Barron’s recently suggested that China Life will benefit more than any of its Chinese peers from rising government bond yields.
Life insurance accounts for 84% of its insurance premiums, health insurance another 12.5% and accident insurance the remainder. Of the three lines of business, China Life’s health insurance segment had the best showing on the bottom line increasing its pretax profit by 275.8% in 2016 to $303.9 million.
So far in 2017, LFC stock is rebounding from the past couple of down years, up 17% through April 25.
Best Chinese Stocks to Buy: China Telecom (CHA)
China Telecom Corporation Limited (ADR) (NYSE:CHA) is China’s third-largest mobile operator; it added 17.1 million subscribers in fiscal 2016 and now has a total of 215 million of which 121.9 million of them are 4G subscribers. Its fixed-line business added 10.1 million subscribers in 2016; it has 123.1 million fixed-line subscribers of which 106 million are Fibre-to-the-Home subscribers.
China Telecom continues to transform its business to meet the needs of the modern Chinese consumer, and the financial results speak for themselves.
Its revenues in 2016 increased 6.4% to $48.1 billion with adjusted net profits (excluding the sale of $563 million in mobile tower assets in 2015) up 11.7% to $2.6 billion.
CEO Jie Yang was recently named the best CEO in Telecommunications for 2016 by Asian financial magazine The Asset. The magazine’s given out these awards for the past 16 years, so it’s a nice feather in the company’s cap.
Best Chinese Stocks to Buy: China Southern Airlines (ZNH)
China is a big country requiring airlines to get people from one province to another much like in the U.S. or Canada. With a growing middle class, the Chinese are traveling more, a big reason why American Airlines Group Inc (NASDAQ:AAL) announced in late March that it had taken a $200 million stake in China Southern Airlines Co Ltd (ADR) (NYSE:ZNH), China’s largest airline.
The arrangement allows China Southern to funnel passengers from parts of China American Airlines it doesn’t serve to connect with its flights to the U.S. and vice versa for travelers arriving from the U.S. and headed to another Chinese destination.
American Airlines’ new relationship could be beneficial to both companies considering the furor caused in China because of the Asian American doctor dragged from a United Continental Holdings Inc (NYSE:UAL) flight earlier in April. UAL, which is said to have more nonstop flights to China than any other U.S. airline, could face a serious blowback as a result.
UAL’s loss is China Southern’s gain.
Best Chinese Stocks to Buy: Ctrip.com (CTRP)
Growing rapidly, Ctrip saw its fourth-quarter 2016 revenues and operating profits rise 76% and 118%, respectively. Going forward, the company expects revenue growth to moderate slightly to around 40% year-over-year, which isn’t too shabby.
The problem with Ctrip is that it makes money on a non-GAAP basis by excluding its stock-based compensation. In 2016 it had an operating loss of $227.7 million. Take out $516.9 million in stock-based compensation, and it becomes a $289.1 million operating profit.
Some investors get bothered by this. However, stock-based compensation has become the norm for public companies, so it’s not going away anytime soon.
A bigger concern is an ongoing investigation that Ctrip hid additional costs within the price of an airline ticket. Nothing’s proven, but before you buy CTRP stock, you’ll want to be sure this is nothing but unsubstantiated allegations.
Best Chinese Stocks to Buy: New Oriental Education & Technology (EDU)
An excellent educational experience early in life can be the difference in a child’s future success or failure as an adult. Therefore, whether we’re talking China or the U.S., the business of education will always be important to each country’s economic growth.
New Oriental Education & Tech Grp (ADR) (NYSE:EDU) is the largest provider of educational services in China. Since its founding in 1993, New Oriental’s enrolled more than 27.9 million students, including 3.6 million in its latest fiscal year through its 789 learning centers across China.
In the past five years, New Oriental’s grown revenues 173.7% from $540 million in fiscal 2011 to $1.5 billion in fiscal 2016. Operating profits over the same period increased 111.7% from $94 million in fiscal 2011 to $199 million in fiscal 2016.
Financially, it’s very sound, with double-digit quarterly growth in revenues and operating profits. Free cash flow, something I always like to see in business, reached $453 million in fiscal 2016, 172.9% higher than five years earlier.
New Oriental is filling a significant need in China, and while it recently faced speculation it doesn’t operate in an above-board manner, nothing’s materialized to substantiate those allegations.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.