As the world’s largest internet market, China has witnessed the rapid digitalization of various businesses during the pandemic. And it is the first country to recover from the pandemic-driven global recession. The country’s GDP increased 18.3% year-over-year in the first quarter of 2021.
To maintain this growth, China has announced plans to increase its R&D spending by 7% between 2021 - 2025 in its five-year plan draft. The IMF has forecast 8.4% growth for China in 2021, compared to 6.4% for the United States. However, a recent Chinese crackdown on Chinese companies’ U.S. listings is a cause for concern.
Despite the regulatory headwinds, we believe small-cap Chinese stocks LexinFintech Holdings Ltd. (LX), GreenTree Hospitality Group Ltd. (GHG), Cango Inc. (CANG), and Qudian Inc. (QD) have the potential to deliver solid upside in the coming months.
LexinFintech Holdings Ltd. (LX)
With a $1.94 billion market capitalization, LX operates as an online consumption and consumer finance platform that offers installments, money loans, wealth management, and other financial services through its subsidiaries. In addition, the company offers technical support and consulting services, software development services, and financial technology services.
On June 22, 2021, LX partnered with Huawei, a Chinese multinational technology company, to jointly tap the opportunities in the Chinese consumer market. Leveraging LX’s expertise in financial technology, product development and operations, and Huawei’s edge in its business ecosystem, public cloud, big data, 5G technology, and artificial intelligence, both companies will collaborate in membership services, joint marketing, fintech product development, and buy-now-pay-later services and capitalize in the provision of enhanced consumption solutions for Chinese consumers.
During its fiscal first quarter, ended March 31, 2021, LX’s total operating revenue increased 17.7% year-over-year to $449.29 million. The company’s gross profit came in at $208.95 million, up 719.8% from the prior-year period. Its pre-tax income has been reported at $128.57 million, compared to a $113.46 million loss in the prior-year period. LX’s adjusted net income was $117.73 million, compared to a $84.10 million loss in the prior-year period. Its adjusted net income per ADS came in at $0.57, compared to a $0.46 loss. The company had $356.92 million in cash and cash equivalents as of March 31, 2021.
A $2.08 consensus EPS estimate for the current year represents a 208.8% year-over-year improvement. It surpassed the Street’s EPS estimates in three of the trailing four quarters. The $2.07 billion consensus revenue estimate for the current year represents a 15.9% rise from the prior-year period. Analysts expect the stock’s EPS to grow at 2.4% rate per annum over the next five years. LX has climbed 11.8% over the past three months and 66% over the past six months. It closed yesterday’s trading session at $10.61.
LX's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Value, Momentum, and Sentiment. We have also graded LX for Growth, Stability, and Quality. Click here to access all LX ratings. LX is ranked #1 of 71 stocks in the China group.
GreenTree Hospitality Group Ltd. (GHG)
GHG develops and sells leased-and-operated, and franchised-and-managed hotels through its GreenTree Inns brand and serves the hospitality industry worldwide. The company offers guest houses, board rooms, banquet halls, wedding venues, serviced apartments, and shell inns. It has a market capitalization of $1.10 billion.
For its fiscal fourth quarter, ended December 31, 2020, GHG's total revenues improved marginally year-over-year to $44.41 million. The company’s income from operations came in at $18.15 million, up 19.9% from the prior-year period. While its non-GAAP core net income increased 22.3% year-over-year to $16.76 million, its net income per ADS increased 21.8% year-over-year to $0.16. As of December 31, 2020, the company had $97.12 million in cash, cash equivalents and restricted cash.
Analysts expect GHG’s EPS to grow 95.9% year-over-year for the current year to $0.84. Its revenue is expected to improve 50.7% year-over-year for the current year to $93.50 million. The stock’s EPS is expected to grow at a 6.6% rate per annum over the next five years. GHG closed yesterday’s trading session at $10.70.
GHG’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our POWR Ratings system.
The stock has a B grade for Growth and Momentum. In addition to the POWR Ratings grades we’ve just highlighted, one can see GHG’s ratings for Value, Sentiment, Quality, and Stability here. GHG is ranked #13 in the China group.
Cango Inc. (CANG)
With a market cap of $728.31 million, CANG operates an automotive transaction service platform that connects dealers, financial institutions, car buyers, and other industry participants. The company delivers automotive financing services that include facilitating financing transactions between financial institutions to car buyers, automotive transactions between automotive wholesalers, dealers, and car buyers, and after-market services to car buyers.
On April 20, 2021, CANG’s Shanghai Cango Network Technology Co., Ltd. subsidiary entered a strategic agreement with Zhengzhou Nissan Auto Sales Service Co., Ltd., to jointly develop a new retail model for automotive transactions in China's lower-tier markets. CANG’s subsidiary will also provide automobile financial products and services to customers of Zhengzhou Nissan's certified secondary dealer stores and will leverage all its car dealers and local warehouses and efficient logistics across the lower-tier markets.
CANG’s subsidiary Fushun Insurance Co., Ltd., and Guoren Property and Casualty Insurance Co., Ltd. in April agreed to strengthen their cooperation in the areas of insurance product research and development, channel expansion, automobile big data, internet marketing and internet of vehicles to provide high-quality insurance services and experiences to insurers and account holders. CANG's revenues came in at $171.52 million for its fiscal first quarter ended March 31, 2021, which represents a 356.8% improvement year-over-year. The company’s income from operations is reported at $24.35 million for the quarter, compared to a $11.48 million loss in the year-ago period. As of March 31, 2021, the company had $248.94 million in cash and cash equivalents. CANG achieved and surpassed consensus EPS estimates in three of the trailing four quarters. A $775.38 million consensus revenue estimate for the current quarter represents a 145.3% gain from the prior-year period. Analysts expect the stock’s EPS to grow at 11.1% rate per annum over the next five years. The stock ended yesterday’s trading session at $4.99.
CANG’s POWR Ratings reflect its solid prospects. The company has an overall B rating, which translates to Buy in our proprietary ratings system.
CANG has a B grade for Value, Quality, and Momentum. In addition to the POWR Ratings grades we’ve just highlighted, one can see CANG’s ratings for Growth, Stability, and Sentiment here. CANG is ranked #7 in the China group.
Qudian Inc. (QD)
QD is principally involved in the operation of an online customer credit technology platform. The company uses big data-enabled technologies, such as artificial intelligence (AI), and operates an online platform, with nearly all the transactions facilitated through mobile devices. It has a market capitalization value of $539.08 million.
QD’s non-GAAP net income for its fiscal first quarter, ended March 31, 2021, came in at $74.53 million, compared to a $128.17 million loss in the prior-year period. The company’s non-GAAP EPS has been reported $0.28 for the quarter, compared to a $0.50 loss in the year-ago period. As of March 31, 2021, QD had $333.90 million in cash and cash equivalents.
A $0.95 consensus EPS estimate for the current year represents a 315.8% improvement year-over-year. It achieved and surpassed the Street’s EPS estimates in each of the trailing four quarters. CAAS has gained 62.6% over the past three months to close yesterday’s trading session at $2.31.
It’s no surprise that QD has an overall B rating, which equates to Buy in our POWR Ratings system. The stock has an A grade for Value, and a B grade for Momentum and Quality. To see additional POWR Ratings for QD’s Growth, Stability, and Sentiment, click here. QD is ranked #9 in the China group.
LX shares were trading at $9.25 per share on Thursday afternoon, down $1.36 (-12.82%). Year-to-date, LX has gained 38.06%, versus a 15.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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