Why Chinese stocks are rising this week – November 3, 2022
Amid all the economic uncertainty this week, stocks of China-based companies are doing very well.
Of all these actions, I have selected five which you can see in the table below. Zai Lab Ltd. (ZLAB – Free Report) is up 23.1%, Li Auto Inc. (LI – Free report) up 19.8%, Dingdong (Cayman) Ltd. (DDL – Free Report) up 14.4%, Autohome Inc. (ATHM – Free Report) up 10.1% and JD.com, Inc. (J.D. – Free report) up 6.8%.
Prices so far this week
Image source: Zacks Investment Research
This obviously cannot be linked to Xi’s election victory, as that was last week. Additionally, more than one commenter said he was pretty much a dictator, lashing out at any company or its management if it didn’t subscribe to his worldview or strictly follow the orders. There are also big negatives, like the decoupling between the US and China (which has been going on for a while now), slowing economic growth, and COVID-related shutdowns.
Rumors that the government might ease COVID restrictions may have lifted stocks.
Another possible explanation for the optimism around Chinese equities (and this spans a wide range of industries) could be the high inflation and impending recession that US-based companies are exposed to. US markets are in a state of heightened volatility, not only as fears of a recession grow, but also as the aggressive Fed continues to raise borrowing costs.
Yesterday’s Fed statement suggests a gradually cautious approach to future rate hikes, which makes sense given that we are about 8 months away from the first hike and it normally takes 9-12 months to get an idea. the impact on the economy. So we’re getting there. Future increases may depend on a better assessment of the economic situation.
However, Fed Chairman Powell clearly doesn’t want to enthuse anyone, as it could have the opposite effect. He therefore warned that it is “very premature” to speak of a pivot. The Fed may consider the cumulative effect of its tightening measures, but that would likely lead to a 50 basis point hike next time around rather than a 75 basis point hike. Therefore, it looks like things have to get a lot more painful before they get better.
Other reasons may be company-specific, affecting each action differently:
Zai Lab develops and markets therapies to treat cancer, autoimmune diseases, infectious diseases and psychiatric disorders primarily in Mainland China and Hong Kong. The company, which is expected to report third-quarter results on Nov. 9, has increased revenue by about 200% over the past two years. Since this is drug development, losses are not considered exceptional in the early years and the company invests in building up fixed assets and inventory.
Although earnings are still a few years away, Zacks consensus estimates for 2022 and 2023 point to a 38.9% improvement this year on 45.4% revenue growth. The following year, Zai Lab is expected to improve its profitability by 12.9% on revenue growth of 62.3%.
While monthly shipments from Chinese EV makers weren’t exciting, they remained significantly higher year-over-year. Li Auto saw its October deliveries rise 31% from a year ago while falling 13% from September. If COVID restrictions are truly eased, the company might be able to resume regular production, which would also increase deliveries. Analysts expect revenue growth of 67.6% this year and 70.5% the next. losses are expected to rise to 323.1% this year, with Li raging to profits in the next.
The reopening is also proving positive for e-commerce platform Dingdong. The company sells fresh produce, meat, seafood, ready meals and other food products, such as dairy and bakery products, snacks, oil, seasonings and beverages in China. Last quarter, it saw strong double-digit growth in GMV and revenue with better conversions as more cities began to open up. Attention to quality and range, scale of operations and greater efficiency should generate break even results in December. His next earnings report is Nov. 21.
Analysts currently expect earnings growth of 89.3% this year on revenue growth of 16.6%. Next year, revenues and profits are expected to increase by a further 17.1% and 93.0% respectively.
Autohome, reporting today, offers interactive content and tools through websites and e-commerce apps. Users can use them to search for new or used cars they want to buy. It also provides a range of services and generates revenue through advertising. The company fell on hard times as supply chain issues limited the supply of new cars, which also reduced traffic. However, looser supply chains are leading to greater optimism about car availability, which should translate into better results for the company.
Analysts expect revenue and profit to decline 14.5% and 34.3% respectively this year. But they expect revenue growth of around 7% and earnings growth of 8.6% in 2023.
JD.com provides electronic and general merchandise and supply chain solutions in mainland China. The rise in stock prices can simply be attributed to continued volatility, as there was a sharp drop in the last week of October, followed immediately by a jump, then another drop, before another rise. There is a lot of uncertainty for a company like JD due to the way China has treated Alibaba and the general crackdown on Chinese tech companies lately.
Analysts are currently moderately bullish on JD’s outlook. They are looking for revenue growth of 1.5% and 14.9% in 2022 and 2023, respectively. Earnings growth is expected to be stronger, at 31.4% and 21.6% respectively. The company will report on November 17, after which we’ll know more.
ZLAB and LI stocks carry a Zacks Rank #3 (Hold), DDL shares a Zacks Rank #1 (Strong Buy), ATHM shares a Zacks Rank of #4 (Sell) and JD #2 (Buy).