Chinese stocks rebounded this year amid a boom in tourism-related revenue and on hopes that the Chinese government will take steps to spark growth in the economy. Consistent hammering of stocks in China have made equities’ valuations attractive and long-term analysts believe now is the time to pile into strong Chinese stocks that are undervalued. MSCI China, which includes Hong Kong stocks, trades at just 10.8 times the next 12 months’ earnings. The collapse of the property sector and the Chinese government’s incessant crackdown against tech companies are some of the reasons why investors have been wary of investing in the country. But some analysts believe these crackdowns cannot go on forever and Chinese stocks are undervalued as compared to US stocks. Another factor that could help Chinese stocks is a weakening dollar. A Wall Street analysis said that China would gain from the weakening dollar. The report quoted Gustavo Medeiros, head of research at Ashmore Group, who said:
“There’s a strong case to be made that the dollar has peaked and already started to decline. When the dollar weakens, it typically becomes a virtuous circle of inflows and lending [to emerging markets].”
Another report from the WSJ in August shared similar bullish notes from value investors who are looking at the retreat in Chinese stocks as an opportunity for the long term. The report quoted He Xi, portfolio manager of Nous Capital China Value Fund, who said:
“During economic down cycles when everyone’s more pessimistic, investors turn to deep-value stocks, meaning stocks with relatively low valuations but with good cash flows and dividend payouts, and we’ve been seeing that in China since last year.”
The report quoted several analysts who believe many notable Chinese companies have become both growth and value plays. For example, Alibaba and Tencent are two of the biggest tech companies in China. Both these stocks have seen a lot of volatility amid crackdowns and regulatory concerns. But their valuations are now attractive and both growth and value investors see these companies as attractive. In this backdrop, major Chines companies like Alibaba Group Holding Limited (NYSE:BABA), Pinduoduo Inc. (NASDAQ:PDD), and Trip.com Group Limited (NASDAQ:TCOM) are seeing an increased activity from hedge funds and retail investors.
But not everyone is bullish on China. According to a Bloomberg report, Jason Pidcock of Jupiter Asset Management Ltd. recently said that he expects Chinese stocks to remain under pressure for several years to come. The investor said that the property sector had an adverse effect on the Chinese economy. Pidcock called the latest rally in Chinese stocks a “short-term fad” and said that it would be difficult to see improvement in China for the next four years. The Bloomberg report added that Pidcock’s Jupiter Asian Income strategy beat a whopping 97% of its peers over the past three years, and part of the reason behind this outperformance was the investor’s strategy to stay away from China. The investor, talking to Bloomberg, said that China is a different political system and it seems the country’s priorities do not include allowing investors to make money from the stock market.
Cheap Chinese Penny Stocks to Buy According to Hedge Funds
For this article, we first used a stock screener to list down all Chinese penny stocks (under $10) with PE ratios under 20. We then picked 11 of these stocks with the highest number of hedge fund investors. We gauged hedge fund sentiment for these equities using Insider Monkey’s database of 910 hedge funds. Unlike Alibaba Group Holding Limited (NYSE:BABA), Pinduoduo Inc. (NASDAQ:PDD), and Trip.com Group Limited (NASDAQ:TCOM), the stocks mentioned in this article are penny stocks. Therefore the number of hedge funds bullish in these stocks is small.
11 Cheap Chinese Penny Stocks to Buy According to Hedge Funds
China-based personal finance company X Financial (NYSE:XYF) ranks 11th in our list of the best cheap Chinese penny stocks to buy now. As of the end of the second quarter of 2023, 3 hedge funds out of the 910 funds tracked by Insider Monkey reported owning stakes in X Financial (NYSE:XYF). The biggest stakeholder of X Financial (NYSE:XYF) was Austin Wiggins Hopper’s AWH Capital which owns a $1.5 million stake in the company.
iHuman Inc. (NYSE:IH) is a Chinese education services company. iHuman Inc. (NYSE:IH)’s PE ratio as of October 9 stand at 6.84. Over the past one year iHuman Inc. (NYSE:IH) is up about 52%. In September iHuman Inc. (NYSE:IH) posted second quarter results. Adjusted EPADS in the quarter came in at $0.11. Revenue in the period jumped 4.5% on a year-over-year basis thanks to increased user engagement.
As of the end of the second quarter of 2023, 3 hedge funds out of the 910 hedge funds tracked by Insider Monkey had stakes in iHuman Inc. (NYSE:IH). The biggest stakeholder of iHuman Inc. (NYSE:IH) during this period was Rebecca Lewis And Gordon Yeo’s Arisaig Partners which has a $7.6 million stake in the company. IH is one of the cheap Chinese penny stocks to buy according to hedge funds.
Consumer credit platform company Qudian Inc. (NYSE:QD) shares have gained about 128% year to date through October 9. In September Qudian Inc. (NYSE:QD) posted second quarter results. Adjusted net loss in the period came in at RMB75.5 million or $10.4 million. Non-GAAP net loss per diluted ADS was RMB0.34 or $0.05.
Out of the 910 hedge funds tracked by Insider Monkey, 5 hedge funds reported owning stakes in Qudian Inc. (NYSE:QD). The biggest hedge fund stakeholder of Qudian Inc. (NYSE:QD) during this period was Ken Griffin’s Citadel Investment Group which had a $364,874 stake in the company. QD is one of the top cheap Chinese penny stocks to buy according to hedge funds.
Power steering systems and components company China Automotive Systems, Inc. (NASDAQ:CAAS) ranks 8th in our list of the best cheap Chinese penny stocks to buy according to hedge funds.
As of the end of the second quarter of 2032, 5 hedge funds in Insider Monkey’s database of 910 hedge funds reported owning stakes in China Automotive Systems, Inc. (NASDAQ:CAAS). The most significant stakeholder of China Automotive Systems, Inc. (NASDAQ:CAAS) during this period was Israel Englander’s Millennium Management which owns a $1.4 million stake in the company.
China Automotive gave some important business updates during its Q2 earnings call. The management said:
Our efficient cost controls led to an approximate 11% year-over-year decline in total operating expenses, resulting in an [$8.2 million] (ph) operating profit in the second quarter. Net income per share grew by 12.9% to $0.35 compared with the same quarter last year. At June 30, our cash and equivalents and pledged cash was $125.5 million, approximating $4.16 per share.
FinVolution Group (NYSE:FINV) is an online consumer finance platform. In August FinVolution Group (NYSE:FINV) posted second quarter results. Non-GAAP EPADS in the quarter came in at $0.28. Revenue in the period jumped 15.4% year over year to $424.4 million.
During the Q2 earnings call FinVolution Group (NYSE:FINV) talked about its guidance and future expectations:
“Taking the current China macro environment into consideration, the company’s 2023 guidance for its China market remains unchanged at between RMB 189 billion to RMB 205 billion, representing year-over-year growth of between 10% to 20%. Before I conclude my remarks, let me provide some additional color on our biggest outlook for the third quarter of 2023. Despite some uncertainties in the macro environment, our business trajectory remains solid. We expect our transaction volume in China for the third quarter of 2023 to be around RMB 49 billion, representing an increase of around 10.4% year-over-year. We expect our transaction volume in international markets for the third quarter to be around RMB 1.9 billion, representing an increase of around 73% year-over-year.”
As of the end of the second quarter of 2023, 7 hedge funds out of the 910 hedge funds in Insider Monkey’s database reported owning stakes in FinVolution Group (NYSE:FINV). The biggest stakeholder of FinVolution Group (NYSE:FINV) during this period was Noam Gottesman’s GLG Partners which owns a $14.4 million stake in the company.
TH International Limited (NASDAQ:THCH) Limited is the operator of Tim Hortons coffee shops in mainland China. In June TH International Limited (NASDAQ:THCH) saw a 27% system-wide same-store sales growth in June.
TH International Limited (NASDAQ:THCH) also said that it plans to enter 40 new cities in China this year.
Out of the 910 hedge funds tracked by Insider Monkey, 9 hedge funds had stakes in TH International Limited (NASDAQ:THCH).
Unlike Alibaba Group Holding Limited (NYSE:BABA), Pinduoduo Inc. (NASDAQ:PDD), and Trip.com Group Limited (NASDAQ:TCOM), Chinese penny stocks are risky but some hedge funds are still opening bold positions in these companies in hopes of seeing long-term gains.
