Time to be bullish on China again? JP Morgan sees buying opportunities in these 2 Chinese stocks

Chinese stocks have come under pressure for a variety of reasons over the past year and a half. A slowing economy has been a cause, while domestic wrangles with regulators haven’t helped either, particularly for those in the tech sector. Another factor keeping sentiment low and weighing on performance is fear of a delisting for US-listed Chinese stocks. This is because Chinese companies do not meet US audit standards. But the prospect of a write-off may be less likely now.

An agreement has been signed by the China Securities Regulatory Commission and the US Public Accounting Firm Oversight Board, which stipulates that the pair will work together to review audit working papers of US-listed Chinese companies. That could potentially save the delisting of 261 Chinese companies with a combined market capitalization of about $1.3 trillion.

So, is it time to get bullish on Chinese stocks again? Analysts at banking giant JP Morgan certainly think a pair of Chinese names are worth a closer look right now. And what about the rest of the way? With the help of the TipRanks platform, we can also measure the sentiment of other experts. Let’s dive in.

Baidu (BIDU)

We’ll start with the Chinese internet giant Baidu. How giant? It is the world’s third largest search engine with a strong market share dominance in China, far surpassing global leader Google. Baidu’s search engine business is its bread and butter, but it is also a technology innovator and leader in artificial intelligence (AI). In addition to the Baidu Maps mapping service, it provides 57 search and community services, such as the Baidu Wangpan cloud storage service and the Baidu Baike online encyclopedia. In 2007, Baidu became the first Chinese company to gain a spot on the NASDAQ-100 index.

So, it’s no longer the time we’re talking about here, as seen in its latest quarterly report – for 2Q12. Revenue may have fallen 5% year-on-year to “just” $4.43 billion as a result of the economic slowdown, but the number still beat the consensus estimate of $4.20 billion.

The profitability profile received a real boost from a significant 500 basis point margin expansion – from 17% in the first quarter to 22% in the second quarter. This led to a complete beat on the bottom line as adj. Earnings per ADS of $2.36 were well ahead of the $1.63 expected on Wall Street.

The performance was applauded by JP Morgan’s Alex Yao, who believes it’s time for a change of tune in the stock. After Q2 came out, Yao upgraded BIDU’s rating from Neutral to Overweight (i.e. Buy). Yao’s price target stands at $200, leaving room for the stock to appreciate ~42% over the next year. (To follow Yao’s history, Click here)

Explaining his bullish stance, Yao writes: “We believe there is positive consensus driven by a margin extrapolation over the next 2 quarters as a result of positive operating leverage (sequential recovery) and cost optimization, particularly in traffic and content acquisition costs . We highlight AI Cloud’s potential breakeven in the next 2-3 years as BIDU selectively focuses on the most profitable verticals that could offset lower margins from ASD (Apollo self drive) as contribution starts from late 2023 onwards … We expect upward revisions to earnings estimates, which in turn will drive the share price higher.”

Most on Wall Street share Yao’s bullish sentiment. Out of 14 recent analyst reviews, 13 are positive, leading to a strong buy consensus. The average goal is a touch above Yao’s. at $207.71, investors are looking for a 12-month upside of 47%. (See Baidu stock prediction on TipRanks)

Futu Holdings (FUTU)

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

China is such a huge market, there is potential for huge growth, but as a financial technology company, it is also exposed to the whims of the Chinese regulator.

This is definitely a risk, but despite this, revenue has been growing steadily for the past 3 quarters. Q2 results are hot out of the oven and show a $222.6 million top line, up 9.6% year-over-year.

The total number of paying customers increased by 38.6% year-on-year to 1.39 million, while the total number of users increased by 20% from the same period last year to 18.6 million. In essence, GAAP EPADS of $0.57 just beat the $0.56 expected on Wall Street.

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

First,” says the analyst, “Futu’s 2Q12 results beat expectations due to solid customer growth, market share growth and higher gross commission rate. Second, regulators in the US and China have signed an agreement to cooperate in the control of China’s ADR stocks, which partially reduces the delisting risk, in our view. Third, our China Internet analyst Alex Yao expects China Internet stocks to post further gains in Q3.”

As for Lei’s, the results deserve an upgrade. the rating moves from Neutral to Overweight (i.e. Buy), while the price target is pushed higher – from $55 to $62. The implications for investors? Up 28% from current levels. (To track Lei’s history, Click here)

Moving now to the rest of the Street, where 3 more analysts support Lei’s stance, and with the addition of 1 Hold and Sell, each, the stock claims a consensus rating of Moderate Buy. According to the average target of $55.5, there is a potential of ~14% growth in the next year. (See Futu Stock Prediction on TipRanks)

To find good ideas for Chinese stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all of TipRanks’ stock information.

Disclaimer: The views 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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