We recently compiled a list of the 10 Worst Chinese Stocks to Buy Right Now According to Short Sellers. In this article, we are going to take a look at where Gaotu Techedu Inc. (NYSE:GOTU) stands against the other communication services stocks.
Between January 2024 to late August 2024, the Chinese equity markets have witnessed a significant rebound. On a YTD basis, the Hang Seng Index saw an increase of over 3%. Both onshore and offshore Chinese equities were able to generate positive returns, with materials and industrial sectors in the positive territory. This growth was seen mainly due to resilience in the broader Chinese economy, with the country’s GDP increasing by 5.3% YoY in 1Q, exceeding market expectations.
However, China’s economy grew much slower than anticipated in 2Q as a protracted property downturn and job insecurity impacted the broader economy. Market experts expect that Beijing might have to unleash even more stimulus measures. China’s economy saw an increase of 4.7% in April-June, the slowest growth since 1Q 2023 and missing a 5.1% estimate by the broader market.
Outlook for Chinese Economy
Earlier in the year, China announced its ambitious goal of reaching 5% economic growth in 2024. The strong growth of new industries together with fresh drivers should continue to help the broader Chinese economy. Experts believe that new avenues of growth are needed for China to see steady growth. This includes expansion in new and transforming industries such as AI, digital financial services, and green technologies such as EVs.
China’s clean energy sector already made up for ~40% of the country’s economic expansion in 2023, reported the World Economic Forum. Meanwhile, spending by private-sector on research and development doubled over the past five years. Experts opine that high-quality growth is required to be rooted in advanced technologies.
Industries related to high-quality growth include generative AI systems, semiconductors, and renewable energies. As per experts, tapping into these sectors, with the required investments, should add to the growth of the broader Chinese economy and equities. Also, maintaining efficient supply chains and gaining access to global markets should help in achieving high-quality growth.
Where Are Chinese Equities Headed for Remainder of 2024?
The valuation of Chinese equities is at low levels as compared to other major markets globally. The valuation of the Hong Kong stock market remains around low levels that were witnessed during previous market turmoil, like the 2008 global financial crisis, the 2011 European debt crisis, and other Black-Swan events. The continuous improvement of economic fundamentals and more supportive measures to address challenges are expected to translate the current low valuations into a sustained rally.
The country’s economic growth over the upcoming 2 years should surpass the global average, including both developed and developing economies. Domestically, the potential ramp-up in government bond issuance is likely to support expanded infrastructure investment in 2H 2024. As per China Asset Management (Hong Kong) Limited’s mid-year outlook, ~70% of the 2024 bond issuance quota is unused. This is even after a strong jump in bond issuance seen in May.
The country’s exports are likely to remain strong in 2H 2024. All these factors should bring stability to the overall economy and result in the recovery of corporate earnings, driving equity markets.
With improvement expected in the Chinese economy, underpinned by supportive policies, the overall risk appetite should increase gradually in 2H 2024. This should result in increased inflows in the equities in 2H 2024.
Therefore, investors might rebalance their portfolios towards both value and growth sectors. China Asset Management (Hong Kong) Limited believes that investors should use state-owned enterprises (SOEs) providing high dividends to build a robust investment foundation, mainly for those having clear competitive edges and operating advantages.
Our methodology
To list the 10 Worst Chinese Stocks to Buy Right Now According to Short Sellers, we used a Finviz screener to filter out the Chinese stocks. Next, we narrowed our list by selecting the stocks having high short interest. Finally, these stocks were ranked in ascending order of their short interest.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A senior executive looking up at a large boardroom filled with the stocks their company manages.
Gaotu Techedu Inc. (NYSE:GOTU)
Short % of Float (8/30/2024): 7.32%
Number of Hedge Fund Holders: 18
Gaotu Techedu Inc. (NYSE:GOTU) is a technology-driven education company, having core expertise in online K -12 courses.
Short sellers believe that the company continues to face challenges when it comes to balancing growth with financial stability. Moreover, Gaotu Techedu Inc. (NYSE:GOTU) is expecting a significant net loss for the year of ~RMB1 billion. The company continues to face difficulties in controlling its aggressive expansion strategy along with managing its financial health. The higher expenses are expected to prevail for the foreseeable future due to its expansion efforts into offline markets.
In 2Q 2024, Gaot Techedu Inc. (NYSE:GOTU)’s cost of revenues went up 70.0% to reach at RMB313.4 million from RMB184.4 million in 2Q 2023. This was mainly because of the expansion of the instructors and tutors workforce and the elevated cost of learning materials.
That being said, Wall Street analysts opine that increased retention rates and its diversification of customer acquisition channels, which includes live streaming, social media, and offline channels, should act as principal growth enablers. Gaot Techedu Inc. (NYSE:GOTU)’s focus on enhancing its quality of teaching and learning experience should result in increased retention rates and student engagement.
Given its strategic emphasis on talent cultivation and operational efficiency in customer acquisition, Gaot Techedu Inc. (NYSE:GOTU) continues to position itself for strong and stable growth and for expansion in educational offerings. Considering the company’s focus on offline expansion and application of AI to improve cost reduction and efficiency, Gaot Techedu Inc. (NYSE:GOTU) expects total net revenues in the range of RMB1.188 billion – RMB1.208 billion. Also, strong growth in gross billings should continue for the foreseeable future.
As per Wall Street, Gaot Techedu Inc. (NYSE:GOTU) has an average price target of $2.94. Additionally, 18 hedge funds were long Gaot Techedu Inc. (NYSE:GOTU) in 2Q 2024, up from 17 in the preceding quarter.
Overall GOTU ranks 9th on our list of the worst Chinese stocks to buy right now according to short sellers. While we acknowledge the potential of GOTU as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that’s more promising than the stocks on our list, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.