Morgan Stanley has identified several Chinese stocks expected to experience significant earnings growth in the coming years. Espressif Systems, Zijin Mining, and SICC top the list for 2025, with projections of at least a 40% increase in earnings per share. Despite Chinese stocks missing earnings expectations for 13 consecutive quarters since late 2021, a potential rebound in Chinese equities appears promising. This optimism arises amidst Beijing's efforts to alleviate deflationary pressures and an increasing reliance on overseas revenue due to a slowing domestic economy.
The criteria for Morgan Stanley's selection include stocks rated as overweight or equal weight with a market capitalization exceeding $2 billion and an average daily trading turnover of over $2 million. This strategic approach highlights the potential for robust financial performance in companies like Espressif Systems, which develops chip sets for home appliances and witnessed its net profit more than double in 2024. Similarly, Zijin Mining, known for extracting metals such as copper, gold, zinc, and lithium, reported a more than 50% rise in net profit in the third quarter compared to the previous year. SICC, founded in 2010, specializes in producing silicon carbide substrates used in semiconductors.
"Quality earnings beats becoming a proven alpha generator in the China equity space and should continue to be so," – Morgan Stanley analysts.
Bernstein analysts also anticipate growth for companies like PDD and Alibaba in the coming year. PDD, in particular, has a price target of $150 per share, representing more than a 40% upside from Thursday's close. The analysts argue that PDD's experience in the U.S., where profitability surged after reducing new user acquisition efforts, illustrates a viable path to profitability elsewhere.
"From an investing standpoint, our sense is global (and in particular US) investors take a very US-centric view of Temu, and what it means for PDD's shares," – Bernstein analysts.
"In contrast, we'd argue that Temu's US experience in the past 12-18 months — showing a large jump in profitability once new user acquisition was de-emphasised — demonstrates the path to profitability elsewhere," – Bernstein analysts.
Aaron Costello, head of Asia at Cambridge Associates, emphasized the potential for a sharp rebound in Chinese equities. He advocates for a neutral stance on China rather than an underweight position, driven by Beijing's clear intention to combat deflation pressures. Costello notes that regardless of tariff impacts, domestic stimulus measures will play a crucial role in China's economic trajectory.
"The potential for Chinese equities to rebound sharply is there, so we don't want to be underweight China, we want to be neutral," – Aaron Costello, head of Asia at Cambridge Associates.
"Regardless of what the number of the tariffs are for China, it comes back to the domestic stimulus for China and whether China can alleviate the deflation pressures," – Aaron Costello, head of Asia at Cambridge Associates.
As Chinese companies face slower economic growth at home, overseas revenue streams have become increasingly vital. Bernstein highlighted that while geopolitical concerns may impact cross-border e-commerce, markets outside the U.S. remain substantial. In 2023, total e-commerce gross merchandise value in the U.S. reached $1.1 trillion, with the next 29 markets collectively achieving a GMV of $1.5 trillion.
"The potential for Chinese equities to rebound sharply is there, so we don't want to be underweight China, we want to be neutral," – Aaron Costello, head of Asia at Cambridge Associates.
"In contrast, we'd argue that Temu's US experience in the past 12-18 months — showing a large jump in profitability once new user acquisition was de-emphasised — demonstrates the path to profitability elsewhere," – Bernstein analysts.
Leave a Reply