Which Chinese Stock Could Offer Higher Upside Potential on Rebound?

Stock Market

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

Furthermore, delisting concerns for the U.S.-listed Chinese stocks over regulatory non-compliance also weighed on the stocks. In late August, Beijing and Washington reached a deal that will allow U.S. regulators to inspect the audit work papers of U.S.-listed Chinese companies.

Amid an uncertain macro backdrop, Wall Street analysts continue to be confident about several Chinese stocks based on their ability to navigate the ongoing challenges and deliver long-term growth. The list includes Alibaba, JD.com and XPeng. While these stocks are in the red year-to-date (YTD), Wall Street seems optimistic about a strong rebound in the months ahead.

Using TipRanks’ Stock Comparison tool, I stacked these Chinese stocks up against each other to select the stock that, as per Wall Street analysts, could offer higher upside potential.

BABA Alibaba $78.03
JD JD.com $52.04
XPEV XPeng $13.80

Alibaba (BABA)

Alibaba (BABA) logo on the side of a glass-walled building.

Source: testing / Shutterstock.com

E-commerce behemoth Alibaba (NYSE:BABA) has been under pressure due to China’s crackdown on Big Tech due to antitrust concerns and other violations. Moreover, Alibaba, like many other Chinese companies, faced delisting concerns with regard to its U.S.-listed shares. Recently, Reuters reported that Alibaba, JD.com and several other U.S.-listed Chinese companies have been notified of a U.S. audit inspection following the audit deal between the two countries.

Aside from regulatory woes, China’s Covid-19 restrictions have been impacting Alibaba’s performance. In the June quarter (Q1 fiscal 2023), adjusted earnings per American Depositary Share (ADS) plunged 29% while revenue was flat compared to the prior-year quarter. That said, Alibaba managed to beat the Street’s expectations due to its operating efficiency measures and cost optimization.

Covid-related supply chain and logistics disruptions caused a 1% decline in the June-quarter revenue from Alibaba’s China commerce segment, which is Alibaba’s largest division. Meanwhile, the cloud segment’s revenue grew 10%, though it slowed down compared to the previous quarter. Despite ongoing uncertainties, Alibaba is confident about building its long-term capabilities backed by its strong cash position.

Based on improving trends in the June-quarter results, Robert W. Baird analyst Colin Sebastian raised his price target for BABA stock to $140 from $134 and maintained a “buy” rating. That said, the analyst feels that it is “too early to give the ‘all-clear’ signal.” Sebastian adds that the company’s efforts to grow wallet share with existing customers can boost its efficiency and margins.

All in all, with 17 “buys” versus just one “sell” rating, Alibaba scores the Street’s “strong buy” consensus rating. BABA stock’s average 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 Silicon Valley office.

Source: Sundry Photography / Shutterstock.com

JD.com’s (NASDAQ:JD) revenue grew 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 smashed analysts’ revenue and earnings expectations due to the strong performance of its retail segment.

Q2 adjusted earnings per ADS jumped to RMB 4.06 from RMB 2.90 in the prior-year quarter. The retail segment’s Q2 profitability benefited from the annual “618” shopping festival as well as cost optimization and efficiency measures.

Additionally, JD.com is taking initiatives to improve the profitability of its logistics business. The company’s operations and technology optimization measures, along with cost discipline, drove a 150-basis-point improvement in the logistics segment’s adjusted operating margin and helped it turn positive in Q2.

While JD.com cautioned investors about near-term uncertainties, it is confident about facing the ongoing challenges backed by its supply chain capability and continued focus on operating efficiency.

Following the Q2 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 capability to deliver reaccelerated top-line growth and active user count once the pandemic fades away.

Overall, the Street’s consensus rating for JD.com is a “strong buy” based on the bullish reviews of nine analysts and one “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 tablet. XPEV Stock

Source: Koshiro K / Shutterstock

XPeng (NYSE:XPEV) has rapidly emerged as one of the popular electric vehicle (EV) makers 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 woes triggered by Covid-19 lockdowns. XPeng also disappointed investors by issuing lackluster guidance for the third quarter.

Furthermore, XPeng’s August deliveries increased 33% YOY to 9,578 vehicles but declined 17% compared to July deliveries. Overall, XPeng has delivered 90,085 EVs in the first eight months of 2022, up 96% YOY. Analysts are looking beyond the near-term hiccups and expect the company’s growth to gain momentum with the newly launched G9 SUV and two other models scheduled to be launched in 2023.

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

Yu contends that if G9’s pricing is around 400,000 RMB or lower, then the model would do well for at least two to three quarters. This he feels might address some demand concerns.

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

“While continuing its vehicle promotions, XPeng looks for a more meaningful MoM [Month-over-Month] upturn in September sales, implying upside to the company’s sales guidance of 29-31k 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 “holds.” The average XPeng price target of $44.02 implies 218.9% upside potential.

To conclude, Wall Street analysts are bullish about the long-term potential of the three Chinese stocks discussed above despite multiple near-term risks. XPeng stock has underperformed Alibaba and JD.com so far this year. However, analysts expect XPEV to rebound strongly and outpace the other two Chinese stocks in the months ahead. Indeed, the robust demand for EVs bodes well for XPeng’s long-term growth and could drive a significant recovery in its stock.

On the date of publication, Sirisha Bhogaraju did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the 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 across various sectors, with a primary focus on the consumer sector. Sirisha has a master’s degree in finance.

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