3 “Buy Rated” Chinese Stocks to Buy for 2021 and Beyond

China has been recovering rapidly from the claws of the deadly virus. And, the economic data is reflecting this progress. The country’s Gross Domestic Product (GDP) is projected to grow at 1.9% this year according to the International Monetary Fund’s (IMF) World Economic Outlook released last month. China is also the only economy in the world whose economy will expand this year. 

The United States has already witnessed more than 1 million new COVID-19 cases in the first 10 days of November. With the rising number of coronavirus cases in the United States and consequent market volatility, china stocks are attracting investor’s attention. Moreover, the solid performance of China stocks is reflected in the year-to-date gains of Invesco Golden Dragon China ETF (PGJ) which focuses on companies deriving a substantial portion of their revenues from China but listed on the U.S. stock exchange. The ETF returned 37.9% year-to-date as compared to the S&P 500’s gains of 10.6% over this period.

Even though the Chinese market witnessed a tech sell-off recently owing to greater regulatory controls, it doesn’t seem to be a long-term concern. With these positives, Yum China Holdings, Inc. (YUMC), iQIYI, Inc. (IQ), and Vipshop Holdings Limited (VIPS) are expected to soar in the coming years.

Yum China Holdings, Inc. (YUMC)

Headquartered in Shanghai, China, YUMC is China’s largest restaurant company. The company operates China’s leading restaurant concepts, including KFC and Pizza Hut brands, as well as brands such as East Dawning, Little Sheep, Huang Ji Huang, Taco Bell, and COFFii & JOY. Each of its brands has proprietary menu items and unique recipes to better capture market demand. The company also provides online food delivery services.

YUMC’s total revenues increased 1.3% year-over-year to $2.35 billion for the third quarter ended September 2020. Operating profit increased 86% year-over-year to $556 million. YUMC opened 312 gross new stores in the quarter. Digital orders increased by 97% in the third quarter. EPS increased 100% sequentially to $0.68 surpassing the consensus estimate by 36%.

Analysts expect YUMC’s revenue to increase 7% for the quarter ending December 2020 and 19.8% next year. The company’s EPS is expected to increase by 4% for the quarter ending December 2020, 28% next year and at a rate of 9.8% per annum in the next five years. YUMC has an impressive earnings surprise history with the company beating consensus EPS estimates in each of the trailing four quarters.

On November 6th YUMC signed a framework agreement with the Hubei provincial government to promote the sustainable development of the local economy. In August the company opened a new Taco Bell store in Beijing, its first store in the city. YUMC reached the milestone of 10,000 stores in its restaurant network across China and overseas this year in July. The stock has gained 19.5% year-to-date. It is currently trading 0.9% below its 52-week high of $59.35 which it hit on August 31st.

How does YUMC stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

B for Industry Rank

A for Overall POWR Rating

The stock is also ranked #5 out of 115 stocks in the China industry.

iQIYI, Inc. (IQ)

A subsidiary of Baidu Holdings Limited (BIDU), IQ was founded in 2009. A leading online entertainment service provider in China, the company operates a platform that provides a collection of Internet video content, including professionally-produced content licensed from professional content providers and self-produced content. It also operates through iQIYI Mall, iQIYI Show, and iQIYI Paopao.

IQ’s total revenues increased 4% year-over-year to $1 billion for the second quarter ended June 2020. Membership services revenue increased 19% year-over-year to $572.7 million. The company focuses on high-quality, which has been translated into the financial results too. Content distribution revenue increased 66% year-over-year to $121.8 million. The company is expected to release its third-quarter financial results on November 16th after the market closes.

Analysts expect IQ’s revenue to increase by 9.3% in 2020 and 14.2% in 2021. The company’s EPS is expected to increase 14.5% this year, 39.8% next year, and at a rate of 5.8% per annum in the next five years. IQ’s earnings surprise history looks impressive with the company missing the consensus estimate in just one of the trailing four quarters.

IQ through its premium video-on-demand (PVOD) mode premiered Paramount Pictures' The SpongeBob Movie: Sponge on the Run on November 10th making it China's first animated blockbuster to premiere only one day after the premiere of the film in overseas regions. On October 5th, IQ released its first original film as part of the 13-part film installments which will be released in 2020 and 2021. Last month, the company also announced the upcoming releases of more than 200 shows at its annual iJOY Conference held in Shanghai. The stock has gained 24.9% year-to-date and is currently trading 5.5% below its 52-week high.

IQ’s POWR Ratings reflect this promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” for Industry Rank. Among the China group, it’s ranked #6.

Vipshop Holdings Limited (VIPS)

Founded in August 2008, VIPS is a leading online discount retailer for brands in China. The company has been dominating its niche area and has successfully created a third e-commerce model different from conventional online marketplaces or large-scale multi-category online retailers. VIPS operates through four segments, Vip.com, Shan Shan Outlets, Internet Finance, and Others.

VIPS’ total revenue increased 6% year-over-year to $3.4 billion for the second quarter ended June 2020. The increase in revenue was primarily driven by the growth in the number of total active customers which increased 17% year-over-year to 38.8 million. Net income increased by 88.9% year-over-year to $217.5 million. EPS increased by 38.1% sequentially to $0.29.

The company is to announce the third quarter 2020 financial results on November 13th before the market opens. Analysts expect VIPS’ revenue to increase 16.7% for the about-to-be-reported quarter, 10.5% this year, and 13.6% next year. The company’s EPS is expected to increase by 18.3% in the current year, 22% next year, and at a rate of 2.3% per annum in the next five years. VIPS has an impressive earnings surprise history with the company beating consensus EPS estimates in each of the trailing four quarters.

Last month, VIPS appointed Mr. David Cui as its new Chief Financial Officer. The company is to hold its 2020 annual general meeting of shareholders on December 4th. In the words of Mr. Eric Shen, Chairman, and CEO of VIPS, “Looking ahead, we will continue to focus on enhancing our product offerings, working more effectively with our suppliers to provide our customers with top-notch apparel assortments.” On a year-to-date basis, VIPS has rallied 46% to close yesterday’s session at $20.90. During the past six months, VIPS soared 20.4%.

It’s no surprise that VIPS is rated “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade and Peer Grade and a “B” for Buy & Hold Grade and Industry Rank. In the China group, it is ranked #21.

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YUMC shares were trading at $58.90 per share on Thursday afternoon, up $0.06 (+0.10%). Year-to-date, YUMC has gained 23.02%, versus a 12.01% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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