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Time to get bullish again on China? J.P. Morgan sees buying opportunity in these 2 Chinese stocks

Chinese stocks have come under pressure for various reasons over the past year and a half or so; a slowing economy has been one cause while domestic tussles with the regulators haven’t helped either, particularly for those in the tech sector. Another element keeping sentiment low and impacting performance has been the fear of de-listing for U.S.-listed Chinese stocks. This is on account of Chinese companies not meeting U.S. auditing standards. But the prospects of de-listing might be less likely now.

An agreement has been signed by the China Securities Regulatory Commission and U.S. Public Company Accounting Oversight Board stipulating the pair will work together on inspecting the audit work papers of U.S.- listed Chinese companies. This could potentially save the removal from U.S. stock exchanges of 261 Chinese companies with a combined market cap of around $1.3 trillion.

So, time to get bullish again on Chinese stocks? The analysts at banking giant J.P. Morgan certainly think a pair of Chinese names merit a closer look right now. And what about the rest of the Street? With the help of the TipRanks platform, we can also gauge other experts’ sentiment. Let’s dive in.

Baidu (BIDU)

We'll start with Chinese internet giant Baidu. How much of a giant? It is the third-largest search engine in the world with heavy domination of market share in China, far outpacing global leader Google. Baidu's search engine business is its bread and butter, but it is also a tech innovator and a leader in artificial intelligence (AI). As well as its Baidu Maps mapping service, it provides 57 search and community services, such as cloud storage service Baidu Wangpan, and online encyclopedia Baidu Baike. Back in 2007, Baidu became the first Chinese company to gain a place in the NASDAQ-100 index.

So, it’s no minnow we’re talking about here, as evident in its latest quarterly report – for 2Q22. Revenue might have slipped 5% year-over-year to “just” $4.43 billion as a result of the economic slowdown, but the figure still beat the consensus estimate of $4.20 billion.

The profitability profile got a real boost from a meaningful 500 basis point margin expansion - from 17% in Q1 to 22% in the second quarter. That led to a comprehensive beat on the bottom-line as adj. earnings per ADS of $2.36 fared much better than the $1.63 expected on Wall Street.

The performance was applauded by J.P. Morgan’s Alex Yao who thinks it’s time to change tune on the stock. Following the Q2’s display, Yao upgraded BIDU’s rating from Neutral to Overweight (i.e. Buy). Yao’s price target stands at $200, leaving room for ~42% share appreciation in the year ahead. (To watch Yao’s track record, click here)

Explaining his bullish stance, Yao writes, “We believe there is upside to consensus driven by an extrapolation of margin beat into the next 2 quarters as a result of positive operating leverage (ad sequential recovery) and cost optimization particularly on traffic acquisition and content costs. We highlight the potential breakeven of AI Cloud in the upcoming 2-3 years as BIDU selectively focuses on the more profitable verticals that could offset the lower margins from ASD (Apollo self driving) as contribution kicks in from late-2023 onwards... We expect upward revisions to earnings estimates, which should in turn drive stock price upside.”

Most on Wall Street share Yao’s bullish sentiment; Out of 14 recent analyst reviews, 13 are positive, making for a Strong Buy consensus rating. The average target is a touch above Yao’s; at $207.71, investors are looking at 12-month upside of 47%. (See Baidu stock forecast on TipRanks)

Futu Holdings (FUTU)

Let’s have a look now at Chinese online brokerage platform Futu. The company is a market leader for online brokerage services in China, and in addition to the digitized brokerage, via its Futubull and moomoo platforms, the company offers online wealth management services. These offer access to mutual funds, private funds, and bonds, whilst also providing market data. Renowned for its social features, the platform provides users with a network that links them with companies, analysts, other investors and key opinion leaders.

China being such an enormous market, there’s potential for huge growth but being a financial tech company, it is also exposed to the whims of the Chinese regulator.

That is certainly a risk, but nevertheless, the revenues have been steadily increasing for the past 3 quarters. The Q2 results are hot out of the oven and show $222.6 million at the top-line, amounting to a 9.6% year-over-year increase.

Total number of paying clients grew by 38.6% y/y to 1.39 million, while total number of users rose by 20% from the same period last year to 18.6 million. At the bottom-line, GAAP EPADS of $0.57 just edged ahead of the $0.56 expected on Wall Street.

Assessing the print, J.P. Morgan’s Katherine Lei applauds the “strong business performance,” with several factors informing her positive view.

“First,” says the analyst, “Futu's 2Q22 results beat expectations on the back of stable client growth, market share gain and a higher blended commission rate. Second, regulators in the US and China signed an agreement on cooperation in the inspection of China ADR stocks which partially eases de-listing risk, in our view. Third, our China Internet analyst Alex Yao expects China internet stocks to deliver further earnings beats in 3Q.”

As far as Lei’s is concerned, the results merit an upgrade; the rating moves from Neutral to Overweight (i.e. Buy), while the price target is nudged higher – from $55 to $62. The implication for investors? Upside of 28% from current levels. (To watch Lei’s track record, click here)

Turning now to the rest of the Street, where 3 other analysts back Lei’s stance, and with the addition of 1 Hold and Sell, each, the stock claims a Moderate Buy consensus rating. According to the $55.5 average target, there’s potential for ~14% growth in the year ahead. (See Futu stock forecast on TipRanks)

To find good ideas for Chinese stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

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.
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