We recently published a list of The 10 best Chinese stocks to buy now. In this article, we take a look at how NetEase Inc (NASDAQ:NTES) compares to other Chinese stocks.
Due to improved investor sentiment, almost all major equity markets are up year-on-year, with the exception of Chinese equity markets, which continue to underperform and are trading close to the valuations seen three years ago, before COVID lockdowns.
Over the past three years, Chinese stocks have lost about $6 trillion in value. Global index creator MSCI has already announced it will cut up to 60 Chinese stocks from its indexes in response to underperformance over the past few years. The cut will signal waning need and demand for some of the country’s stocks in foreign investors’ portfolios. Despite the cuts, the index will still include some of the best Chinese stocks to buy right now.
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The underperformance is due to growing concerns about the Chinese economy, which continue to make the investment community nervous. The Chinese economy has always outperformed the US economy, growing 123% between 2012 and 2022, compared to 58% for the US.
Nevertheless, the Chinese economy has struggled with a number of problems in recent years, including a real estate downturn, deflation, high levels of debt and an ideologically motivated policy shift that is driving foreign companies out of the economy.
While the economy grew by 5.2% last year, which is significantly higher than the 2.5% in the US, this was the slowest pace of growth since 1990, excluding the pandemic period. While economists expected the economy to slow even further in 2024, with growth averaging 4.5%, there are early signs of recovery. The Chinese economy grew by 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 well below the double-digit growth rates the country has seen in recent decades, which is causing major concerns in the stock market. On the other hand, the slowdown in economic growth is not the only headwind that is scaring investors away from the Chinese economy.
The deteriorating relations between the US and China have always unsettled investor sentiment. While the US imposed trade tariffs on Chinese companies and restricted access to some key technologies, China hit back with tariffs. Raising tariffs on Chinese electric vehicles from 25% to 100% and imposing trade tariffs on $18 billion worth of imports underscore the ever-deteriorating relations between the two economic powerhouses.
Amid the deteriorating macroeconomic situation, Chinese stocks began to show signs of recovery in the second half of the year. Promising sectors include the fixed asset investment sector, driven by faster investment in manufacturing and infrastructure. In addition, the industrial production and services sectors are also rising, and they are home to some of the best Chinese stocks to buy.
In July, global hedge funds added to their holdings in some of the best Chinese stocks to buy now, as most of them took advantage of low valuations after sharp declines. Still, hedge fund holdings remain near five-year lows.
In addition, analysts at BCA Research believe Chinese equities could protect fund managers from large losses as global risk assets face new threats. The firm has already upgraded onshore Chinese equities to overweight from neutral.
“We expect Chinese equities to fall less or as much as their global and EM peers in a bear market,” analysts including chief China strategist Arthur Budaghyan said in the report. Possible market support from Chinese sovereign wealth funds could mitigate potential declines, he added.
With the economic situation in China improving and sentiment in the stock market improving, now could be the best time to keep an eye on the best Chinese stocks to buy, as they are likely to outperform as we head into the end of the year.
Our methodology
To compile the list of the 10 best Chinese stocks to buy now, we went through the 50 largest US-listed companies 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’re obsessed with the stocks hedge funds invest in. The reason is simple: Our research shows we can beat the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (read more details here).
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NetEase Inc (NASDAQ:NTES)
Hedge fund holdings: 35
Share price potential: 45.10%
NetEase, inc. (NASDAQ:NTES) is a Chinese company engaged in various digital entertainment fields, such as online gaming, music streaming, and educational services over the Internet. The company is organized into several business segments: 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, and also offers games licensed from third-party game developers.
It is one of the best Chinese stocks to buy as it has returned 89% over the past five years. NetEase, Inc. (NASDAQ:NTES) has recorded an average earnings per share (EPS) growth rate of 24% per year. This EPS growth rate is significantly higher than the annual increase in share prices, which was 12% over the same period.
Poland Emerging Markets Growth Strategy stated the following about Net Ease, Inc. (NASDAQ: NTES) in its Q1 2024 investor letter:
“NetEase, Inc. (NASDAQ:NTES) is one of the top players in China’s video game industry, posting decent revenue growth in 2023, particularly in its gaming division, with earnings growth of nearly 20%. The stock also continues to recover after gaming restrictions announced in China last quarter were nowhere near as bad as initially feared.”
Currently, the stock is rated as a Buy with an average price target of $127.50, which represents an upside potential of 45.10% from current levels. There were around 35 hedge fund holders in the company in the second quarter of 2024, compared to 41 in the previous quarter. Orbis Investment Management held the largest position in NetEase, Inc. (NASDAQ:NTES) with 1.91 million shares worth $182.28 million.
Total NTES takes 8th place on our list of the best Chinese stocks to buy. While we recognize NTES’s potential as an investment, we believe AI stocks promise higher returns and in a shorter time frame. If you are looking for an AI stock that is more promising than NTES, read our report on the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
