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Which of these Chinese stocks offers the most upside potential?


China’s retail sales and industrial production data for August was definitely encouraging. Retail sales rose 5.4% year-on-year (YOY) in August, while industrial production rose 4.2%. However, Chinese companies continue to be under pressure due to disruption caused by the country’s “Zero Covid” policy, tensions between the United States and China and a stricter regulatory environment for technology stocks.

In addition, fears of delisting Chinese stocks listed in the United States over non-compliance with regulations also weighed on stocks. At the end of August, Beijing and Washington reached an agreement that will allow US regulators to inspect the audit working papers of Chinese companies listed in the United States.

In an uncertain macroeconomic environment, Wall Street analysts continue to have confidence in several Chinese stocks due to their ability to weather current challenges and generate long-term growth. The list includes Alibaba, JD.com and XPeng. While these stocks have been in the red since the start of the year (YTD), Wall Street seems optimistic about a strong rebound in the coming months.

Using TipRanks’ Stock comparison tool, I stacked these Chinese stocks against each other to select the stock that Wall Street analysts believe might offer the highest upside potential.

BABA Ali Baba $78.03
J.D. JD.com $52.04
XPEV XPeng $13.80

Alibaba (BABA)

Source: test / Shutterstock.com

The e-commerce giant Ali Baba (NYSE:BABA) has been under pressure due to China’s crackdown on Big Tech over antitrust concerns and other violations. Additionally, Alibaba, like many other Chinese companies, has faced delisting issues regarding its US-listed shares. Recently, Reuters reported that Alibaba, JD.com and several other Chinese companies listed in the United States have been notified of a US audit inspection following the audit agreement between the two countries.

In addition to regulatory issues, China’s Covid-19 restrictions have impacted Alibaba’s performance. In the June quarter (Q1 fiscal 2023), adjusted earnings per American Depositary Share (ADS) fell 29% as revenue was flat from the prior year quarter. That said, Alibaba has managed to exceed high street expectations with its operational efficiency measures and cost optimization.

Covid-related supply chain and logistics disruptions led to a 1% decline in June quarter revenue from Alibaba’s China business segment, which is Alibaba’s largest division. Meanwhile, cloud segment revenue grew 10%, although it slowed from the prior quarter. Despite the lingering uncertainties, Alibaba is confident in building its long-term capabilities underpinned by its strong cash position.

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

Overall, with 17 “buys” to just one “sell” rating, Alibaba earns the street consensus “strong buy” rating. BABA’s average share price target of $156.12 implies 99.1% upside potential from current levels.

JD.com (JD)

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

Source: various photographs / Shutterstock.com

JD.com’s (NASDAQ:J.D.) revenue rose 5.4% in the second quarter, marking the e-commerce giant’s slowest quarterly growth due to the resurgence of Covid-19 in China. However, the company still exceeded analysts’ revenue and profit expectations due to the strong performance of its retail segment.

Second quarter ADS-adjusted profit increased from RMB 2.90 in the year-ago quarter to RMB 4.06. The retail segment’s profitability in the second quarter benefited from the annual “618” shopping festival as well as cost optimization and efficiency measures.

In addition, JD.com is taking initiatives to improve the profitability of its logistics activity. The company’s operations and technology optimization measures, as well as cost discipline, led to a 150 basis point improvement in the Logistics segment’s adjusted operating margin and helped it to become positive in the second trimester.

Although JD.com has warned investors of near-term uncertainties, it is confident in the ability to meet the ongoing challenges supported by its supply chain capability and continued focus on operational efficiency.

Following the second quarter print, Citigroup analyst Alicia Yap lowered her price target for JD stock to $91 from $93, but maintained a “buy” rating. Yap is optimistic about the company’s ability to accelerate revenue growth and the number of active users once the pandemic passes.

Overall, the Street Consensus Rating for JD.com is a “Strong Buy” based on bullish reviews from nine analysts and a “Hold” recommendation. At $87.50, the average price target suggests 63.6% upside potential.

XPeng (XPEV)

The logo of Chinese electric vehicle manufacturer Xpeng (Guangzhou Xiaopeng Motors, also known as XMotors.ai) on a tablet.  XPEV Stock

Source: Koshiro K / Shutterstock

XPeng (NYSE:XPEV) has quickly become one of the popular electric vehicle (EV) manufacturers in China, the world’s largest EV market. The company’s losses widened in the second quarter due to rising costs and supply chain and production issues triggered by Covid-19 lockdowns. XPeng also disappointed investors by posting lackluster Q3 guidance.

Additionally, August XPeng deliveries were up 33% year-on-year to 9,578 vehicles, but were down 17% from July deliveries. Overall, XPeng delivered 90,085 electric vehicles in the first eight months of 2022, up 96% year-on-year. Analysts are looking past the short-term setbacks and expect the company’s growth to accelerate with the new G9 SUV and two other models slated for launch in 2023.

Recently, Deutsche Bank analyst Edison Yu placed a new “catalyst call” on XPEV stock as he sees a “temporary rebound” fueled by the launch of the G9 SUV. The company previously revealed that pre-orders for G9 topped 22,000 in 24 hours.

Yu argues that if the price of the G9 is around RMB 400,000 or less, the model would perform well for at least two to three quarters. According to him, this could solve some demand problems.

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

“While continuing its vehicle promotions, XPeng is looking for a more meaningful MoM [Month-over-Month] sales resume in September, implying a rise in the company’s sales forecast from 29 to 31,000 units in 3Q22,” concluded Hsiao, who has a “buy” rating on XPeng.

Overall, XPeng has a “strong buy” consensus rating based on nine “buys” and three “retentions”. The average XPeng price target of $44.02 implies an upside potential of 218.9%.

In conclusion, Wall Street analysts are optimistic about the long-term potential of the three Chinese stocks discussed above despite the multiple short-term risks. XPeng stock has underperformed Alibaba and JD.com so far this year. However, analysts expect XPEV to rebound strongly and outperform the other two Chinese stocks in the coming months. Indeed, 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 had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to 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 industries, primarily focusing on the consumer sector. Sirisha holds a master’s degree in finance.

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