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China’s stock market seems to be at a turning point. The MSCI China index, covering around 85% of China’s equities, was down 11% in 2023. Since 2020’s peak of 29% annual returns, MSCI China was down 21.64% in 2021 and 21.80% in 2022. 

This translates to a market capital drain of nearly $2 trillion as global investors exited the market. Year-to-date, the CSI 300 index, tracking China’s top 300 companies, is down 2.2%, indicating another negative year.

Over the week, however, the blue-chip CSI 300 went up 3%, the biggest rally since March 2022. Following the nation’s sovereign wealth fund (Central Huijin Investment) ETF purchasing spree to halt the three-year market rout, the China Securities Regulatory Commission delivered. 

The Commission is scheduled to update President Xi Jinping by this Tuesday, potentially delivering more market-boosting measures. In the meantime, small cap equities, expressed via the CSI 1000 index, went up 8%.

Will this mark a new beginning after the $7 trillion wipeout from Hong Kong and China equities since early 2021? That is mainly dependent on central planners. JPMorgan forecasts a 66-point bump for the MSCI China index by the end of 2024, translating to a market rise of over 30% since Friday.

For US investors, accessible as American Depositary Receipt (ADR) or ADS, which China-based stocks should be on the watch list?
 

Tencent Holdings Ltd (Nasdaq: TCEHY)

Over one year, Tencent is down nearly 22% but rallied 7% over the week. In addition to having stakes across Snap, Activision Blizzard, Tesla, Epic Games, and others, Tencent is also diversified across China’s logistics giants such as JD.com and leading game-focused live streaming platform DouYu.

In effect, Tencent’s diversification across social media, e-commerce, online advertising, and gaming is a benchmark of its own. In Tencent’s latest earnings released in November, for Q3 2023, the company increased its year-over-year revenue by 10%, while its operating profit of $7.7 billion increased by 36% YoY.

By the end of the quarter, Tencent reported $54 billion in total cash. With an 85% YoY growth in free cash flow of $7.2 billion, the company has ample space for expansion and reinvestments. Tencent’s Mini Games and Video Accounts services boosted high-margin revenue streams while also increasing AI investments. 

Per Nasdaq data, the average TCEHY price target is $49.55 vs. the current $37. The high estimate is $61.1, while the low forecast is above the current price at $41.5 per ADR.
 

PDD Holdings Inc. (Nasdaq: PDD)

Similar to Meta (Nasdaq: META), Pinduoduo is China’s social media and advertising giant and an e-commerce platform that charges merchant fees on sales, marketing, and transactions. 

Over a one-year period, PDD is up 34% but down 13% year-to-date. In the latest Q3 2023 earnings released in November, PDD Holdings reported 94% total revenue increase of $9.4 billion from a year-ago quarter.

The largest revenue increase came from transaction services, up 315%, while sales and marketing grew by 55% at $2.9 billion. PDD’s cash and cash equivalents increased 36% to $27.8 billion as of September 30, 2023.

Per Nasdaq data, the average PDD price target is $176.04 vs. the current $125. The high estimate is $226, while the low forecast is $117 per American Depositary Share (ADS). 
 

Baidu Inc. (Nasdaq: BIDU)

Equivalent to Alphabet (Nasdaq: GOOG), Baidu is China’s leading search engine. In addition to online marketing services and AI integration, Baidu provides non-marketing value-added services such as cloud computing. With a focus on local content via an online-to-offline (O2O) approach, Baidu even expanded into autonomous driving tech.

Over one year, BIDU is down 25%, gaining 2.45% over the week. In the latest Q3 2023 earnings delivered in November, Baidu’s total revenue is up 6% year-over-year to $4.7 billion, while its operating income is up 18%. 

Notably, Baidu’s take on intelligent driving is expanding rapidly. As an autonomous ride-hailing service, Apollo Go increased rides by 73% YoY. Cumulatively, Apollo Go reached 4.1 million rides. Compared to Q2, Baidu’s free cash flow decreased from $1.09 billion to $822 million.

The company is expected to report Q4 2023 on February 6. Per Nasdaq data, the average BIDU price target is $164.39 vs. the current $106. The high estimate is $215, while the low forecast is $120 per ADS.

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