Which Chinese stock could offer more upside potential on a rebound?


Data on retail sales and industrial production in China for August were certainly encouraging. Retail sales grew by 5.4% year-on-year (YOY) in August, while industrial production increased by 4.2%. However, Chinese companies remain under pressure from disruptions caused by the country’s “Zero Covid” policy, tensions between the US and China, and a tighter regulatory environment for tech stocks.

In addition, there are concerns about the withdrawal of US-listed stocks Chinese stocks over regulatory non-compliance also weighed on stocks. In late August, Beijing and Washington reached an agreement that will allow US regulators to review audit working papers of Chinese companies listed on the US stock exchange.

Amid an uncertain macro backdrop, Wall Street analysts remain bullish on several Chinese stocks based on their ability to weather ongoing challenges and deliver long-term growth. The list includes Alibaba, JD.com and XPeng. While these stocks are in the red year-to-date, Wall Street seems optimistic about a strong rebound in the coming months.

Usage TipRanks’ Stock comparison toolI compared these Chinese stocks against each other to pick the stock that Wall Street analysts believe may offer more upside potential.

BABA Alibaba $78.03
JD JD.com $52.04
XPEV XPeng $13.80

Alibaba (BABA)

Source: testing / Shutterstock.com

The e-commerce giant Alibaba (NYSE:BABA) has come under pressure from China’s crackdown on big tech over antitrust concerns and other violations. In addition, Alibaba, like many other Chinese companies, has faced concerns about the withdrawal of its US-listed shares. Recently, Reuters reported that Alibaba, JD.com and several other US-listed Chinese companies were notified of the US audit review following an audit agreement between the two countries.

In addition to regulatory issues, China’s Covid-19 restrictions have affected Alibaba’s performance. In the June quarter (first fiscal quarter 2023), adjusted earnings per share for the US depository (ADS) fell by 29%, while revenue remained the same compared to the previous year’s quarter. Still, Alibaba managed to exceed the Street’s expectations thanks to measures of operational efficiency and cost optimization.

Supply chain and logistics disruptions related to Covid caused a 1 percent decline in revenue for Alibaba’s China trade segment, Alibaba’s largest division, in the June quarter. Cloud revenue, meanwhile, grew 10%, although it slowed from the previous quarter. Despite ongoing uncertainties, Alibaba is confident of building its long-term capabilities, backed by a strong cash position.

Analyst Robert W. Baird based on trends in improving results for the June quarter Colin Sebastian raised his price target on BABA stock to $140 from $134 and maintained a “buy” rating. Nevertheless, the analyst believes that it is “too early to give the ‘all clear’ signal.” Sebastian adds that the company’s efforts to increase share of wallet with existing customers can increase its efficiency and margins.

All in all, with 17 “buy” ratings compared to just one “sell,” Alibaba scores a consensus Street rating of “strong buy.” Average target price of BABA stock $156.12 represents a 99.1% upside potential from current levels.

JD.com (JD)

The JD.com (JD) logo displayed at the entrance to the company's Silicon Valley office.

Source: Sundry Photography / Shutterstock.com

JD.com (NASDAQ:JD) revenue rose 5.4% in the second quarter, the slowest quarterly growth for the e-commerce giant due to a renewed outbreak of Covid-19 in China. However, the company still beat analysts’ expectations on revenue and earnings due to the strong performance of the retail segment.

Adjusted profit per ad in the second quarter jumped to RMB 4.06 from RMB 2.90 in the year-ago quarter. The profitability of the retail segment in the second quarter benefited from the annual shopping festival “618” and cost optimization and efficiency measures.

In addition, JD.com is taking initiatives to improve the profitability of its logistics business. The company’s operations and technology optimization measures, along with cost discipline, drove a 150 basis point improvement in the logistics segment’s adjusted operating margin, helping it turn positive in the second quarter.

While JD.com cautioned investors against near-term uncertainties, it is confident it will face ongoing challenges, supported by its supply chain capacity and continued focus on operational efficiency.

After the Q2 print, Citigroup analyst Alicia Jap cut its price target on JD stock to $91 from $93, but maintained a “buy” rating. Yap is optimistic on the company’s ability to deliver re-accelerated top-line and active user growth once the pandemic subsides.

Overall, the Street’s consensus rating for JD.com is “Strong Buy,” based on nine analysts’ bullish ratings and one “hold” recommendation. At $87.50 it is average target price suggesting a 63.6% growth potential.

XPeng (XPEV)

The logo of the Chinese electric vehicle manufacturer Xpeng (Guangzhou Xiaopeng Motors, also known as XMotors.ai) on the nameplate.  XPEV stock

Source: Koshiro K / Shutterstock

XPeng (NYSE:XPEV) has quickly emerged as one of the popular electric vehicle (EV) manufacturers in China, the world’s largest electric vehicle market. The company’s losses widened in the second quarter due to rising costs and supply chain and manufacturing problems triggered by the Covid-19 lockdowns. XPeng also disappointed investors by issuing vague guidance for the third quarter.

Additionally, August XPeng deliveries increased 33% year-over-year to 9,578 vehicles, but were down 17% compared to July deliveries. Overall, XPeng delivered 90,085 electric vehicles in the first eight months of 2022, up 96% from a year earlier. Looking beyond short-term hiccups, analysts expect the company’s growth to get a boost with the newly unveiled G9 SUV and two other models due for launch in 2023.

Most recently, he is an analyst at Deutsche Bank Edison Yu gave a new “catalyst call” to XPEV shares as it sees a “temporary turnaround” fueled by the launch of the G9 SUV. The company previously revealed that the number of pre-orders for the G9 exceeded 22,000 within 24 hours.

Yu claims that if the price of the G9 is around RMB 400,000 or lower, the model would be good for at least two to three quarters. He believes that this could address some of the concerns about demand.

Meanwhile, a Morgan Stanley analyst Team Hsiao revealed that while his company’s recent checks showed a sequential slowdown in August traffic and orders at flagship XPeng stores, the numbers could improve with test drives for the G9 starting in September. The company expects deliveries of the G9 to begin in October.

“While continuing vehicle promotions, XPeng is looking for a more meaningful MoM [Month-over-Month] an increase in September sales, which means an increase in the company’s sales guidance by 29-31 thousand units in 3Q22,” Hsiao concludedwhich has a “buy” rating on XPeng.

Overall, XPeng has a consensus rating of “Strong Buy” based on nine “Buys” and three “Holds”. XPeng’s average price target of $44.02 implies a 218.9% upside potential.

In conclusion, Wall Street analysts are optimistic about the long-term potential of the three Chinese stocks discussed above, despite a number of short-term risks. XPeng stock has underperformed Alibaba and JD.com this year. However, analysts expect XPEV to rally strongly in the coming months and outperform the other two Chinese stocks. The strong demand for electric vehicles bodes well for XPeng’s long-term growth and could lead to a significant recovery in its stock.

As of the date of publication, Sirisha Bhogaraju did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer and are the subject of InvestorPlace.com Publishing Guidelines.

Sirisha Bhogaraju has over 15 years of experience in financial research. She has written in-depth research reports and covered companies in various sectors, with a primary focus on the consumer sector. Sirisha holds a Masters in Finance.


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