Mid-Cap China Concepts Stocks Q2 2022 Performance Forecasts [3/3]

Technology, Consumer Staples, Consumer Discretionary Author: Contributor, Sally Shi, Fuller Wang Jul 19, 2022 01:52 PM (GMT+8)

The second quarter of 2022 has just passed, and the S&P 500 has declined almost 20%. At the same time, the Sino-US trading war was upgraded to a higher level during the period. Most China concept stocks, under such an environment, are struggling and trying to find ways to break through. EqualOcean picked 30 mid-cap China concept stocks and analyzed their strategy and estimated performance before the upcoming earning reason, to help our investors find investment targets.

Consumer finance

1: Shanghai Petrochemical (SHI: NYSE; 上海石化)

Shanghai Petrochemical (SHI: NYSE) is a leading enterprise in the petrochemical market of Mainland China. Subsiding to Sinopec, Shanghai Petrochemical is mainly involved in producing refined oil, synthetic resins and fibers, and intermediate petrochemicals. From its financial report for Q1 2022, Shanghai Petrochemical gained revenue of CNY 26 billion in this quarter, up 27.61% year-over-year. However, looking into its net profit of CNY 242 million, there is a decrease of 81.81% in this category. We believe that the macro environment, which is the increased international oil price, and the increase in its internal production cost, caused this situation.

Besides, the explosion accident on June 18 has had a negative impact towards the company. At least two explosion points occurred in the ethylene glycol plant area of the Chemical Department. This explosion has caused deaths, hurts, and influences on surrounding people. The safety concerns have risen again, as a similar accident happened in May 2021. In addition, the lockdown in Shanghai in Q2 2022, because of Omicron, also could influence the operation of Shanghai Petrochemical. As people were restricted at home, the factories shut down, and the need for oil decreased. We predict Shanghai Petrochemical’s profit in the second quarter to be continually decreasing, due to the changing oil price, the emergent COVID-19, and the exploration accident. We conservatively calculate the revenue in Q2 2022 to be CNY 20 billion. The amount of net loss should be determined after releasing the exact loss in the accident. 

2: Dingdong (DDL: NYSE; 叮咚买菜)

Dingdong (Cayman) Ltd. (DDL: NYSE) is an e-commerce company that provides fresh produce, meat, seafood, and other daily foods. As founded in 2017, Dingdong has grown quickly and aggressively. It surpassed Miss Fresh, leading O2O e-commerce, in 2019. The financial report for Q1 2022 indicates Dingdong’s huge success. The revenue was CNY 5.44 billion, up 43.2% year-over-year compared with CNY 3.80 billion in Q1 2021. The net loss was CNY 477.4 million, down 65.52% year-over-year compared with CNY 1.38 billion in Q1 2021.

In Q2 2022, we expect a continued increase in its daily operation. Because as Shanghai was influenced and locked down due to COVID-19, the need for online delivery services was risen. As one of the only several surviving e-commerce companies, Dingdong was a hot spot during the lockdown period. “Waking up and grabbing food at 6 and 8:30 in the morning” was a trend followed by Shanghai citizens. We believe the Shanghai lockdown provides great potential for Dingdong to gain a huge amount of profit in Q2 2022. And after the lockdown of Shanghai, more communities have resumed their home delivery policies. Dingdong also then published their new business model for allowing more than 200 cities in Shanghai to provide flexibility for placing orders and attracting more customers. The prefabricated food launched in 2022 also attracts customers pursuing higher living standards. The city withdrawal news in May 2022 also reduces the unnecessary costs for company operation, and maximizes the profit. We predict Dingdong could gain a revenue of CNY 6.50 billion in Q2 2022 with an estimated EPS of maintaining negative, due to its policy change and high order volume resulting from COVID-19 in this quarter, especially in Shanghai. And also, as the temperature is getting higher and higher, people are tired of going outside to eat and shop. Dingdong has discovered the potential for another boost in daily operation. We believe there also might be a chance that Dingdong could reach breakeven.

3: Zhihu (ZH: NYSE; 知乎)

Zhihu (ZH: NYSE) is a question-and-answer website-oriented company. It has ranked as the top one in this track, and is known for its high-quality community that provides in-depth analysis. Zhihu released its financial report for Q1 2022, with revenue of CNY 743 million and a net loss of CNY 614.3 million. The revenue for Q1 2022 was up 55.4% year-over-year compared with CNY 478 million in Q1 2021. We believe that Zhihu is on track for gradual development, as there is no negative news towards the company. Zhihu also was listed again on Hong Kong Stock Exchange in April 2022, indicating another more significant move in the company’s operation. 

We analyze that Zhihu might experience a hard time in breaking the current dilemma of finding a new business point. However, this does not affect Zhihu’s usual operation in the short run. Therefore, Q2 2022 will not be impacted. Besides, as Zhihu has turned into a place where people can learn and gather the information that they need, daily checking on Zhihu has become a tendency for current society. During Q2 2022, people were restricted from staying at home due to COVID-19. People could have more time to check their phones and spend their spare time. Zhihu is one of the hottest mobile apps that people would spend time on, indicating an increased revenue in this period. We predict that in Q2 2022, Zhihu will gain revenue of CNY 800 million, which follows the gradual growth path of Zhihu.

4: Weibo (WB: NASDAQ; 微博)

Weibo (WB: NASDAQ), the subsidiary of Sina Corporation, is a platform to provide a social and distribution community. Weibo has become the major trend for people to follow or publish the hottest topics in current society. From its Q1 2022 financial report, Weibo achieved a revenue of USD 485 million, up 5.6% year-over-year. Weibo has a net loss of USD 68 million, resulting in a loss in the general company’s operation. The number of average daily active users is 251 million, up 9.57% year-over-year. Q1 2022 is also the second consecutive quarter that Weibo experienced a decrease in its operation. 

We believe that Weibo has a strong need to find another business breakthrough. Because the current platform has enough users at an increasing rate. However, as the internet has become more and more fast-growing, if Weibo could not come up with another new business idea, Weibo might be replaced by another similar platform. Besides, Weibo fully released the IP territorial function, showing the real-time vague location of its users. After releasing this decision, people are super worried about their privacy security. Because this function could not be manually turned off. Even though this action could protect people from cyberbullying, people are not optimistic about Weibo. And therefore, this might also lead to a decrease in the company’s usual operation. As a result, we predict Weibo will have a net loss of USD 80 million, under the gradual decrease rate. Even though the company is experiencing descending tendency, in the short run, Weibo will survive from a similar amount of revenue with a slight decrease. However, due to the emergent Covid-19, plenty of companies were effected. And the Covid-19 would also lead to depression in the macro economy, especially among high-tech companies. Therefore, Zhihu might be impacted as well.

5: iQiYi (IQ: NASDAQ; 爱奇艺)

iQiYi (IQ: NASDAQ) is an online video entertainment platform under Baidu Corporation. iQiYi is one of the top well-known video websites in China. Looking into its latest financial report, Q1 2022 is the first quarter that iQiYi achieved profit. The revenue for Q1 2022 was CNY 7.3 billion. The operating profit was CNY 170 million with a profit margin of 4%. As the first one to get rid of the title of “Three loss-making brothers” in the long video content industry, iQiYi earns profit through cutting unprofitable content, reducing costs, and increasing profitable content. We are optimistic about this head strategy in the short run, because, as indicated by the latest financial report, this strategy saves iQiYi from losing money, and provides guidance for future development.

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Besides, in June 2022, The Rap of China 2022 was successfully released on the platform of iQiYi. This show has assembled 24 famous Chinese rappers, attracting more audience to watch. According to Bank, the play index of this online entertainment is 67.96, ranked as the first one compared with other online entertainments that are playing at the same time. With the help of a hot entertainment series, we could imagine as active users increases, iQiYi may earn a huge amount of money through this show. Meanwhile, the profit will also rise. We predict that in Q2 2022, iQiYi’s revenue will be USD 470 million, with an estimated EPS of USD 0.45. Because as the business strategy has changed, iQiYi might maintain to be profitable in the short run. And with the help of hosting the hottest show, iQiYi might be more profitable than the last quarter. iQiYi could also have a higher potential to be the one proving the industry of long video content.

6: Tencent Music Entertainment Group (TME: NYSE; 腾讯音乐)

Tencent Music Entertainment Group (TME: NYSE) provides music streaming services. Tencent Music includes the following apps: QQ Music, Kugou Music, Kuwo Music, and Wesing. Subsidiary to Tencent, Tencent Music has solid financial and resource support from its main company, providing natural advantages to succeed in this track. QQ Music has been competing with NetEase Music for first place in the market for many years. However, we think its financial report does not indicate a good sign. In Q1 2022, Tencent Music gained revenue of CNY 6.64 billion, down 15% year-over-year. This is the second consecutive quarter of Tencent Music’s decline in revenue growth year-over-year. The net profit was CNY 649 million, down 34% year-over-year compared with CNY 979 million in the same period of the previous year.

Even though the direct data implies Tencent Music’s weak performance in Q1 2022, we believe that Tencent Music is on its track to business growth and has a high potential to earn higher profit in Q2 2022. Because as the primary target of Tencent Music, the number of paying users of online music and the payment rate for online music coming with it have reached a higher record consecutively. In Q1 2022, the number of paying users of online music was 80.2 million, up 87.82% year-over-year. The payment rate for online music is 13.3%, increased by 6.8% compared with Q1 2021. We believe that the matter of earning profit could be equal to whether raise the cost of paying to hear online music. Looking into the competition with NetEase Music, Tencent Music maintains its first place in the Chinese music streaming market. Tencent Music has three music apps over the top four. Although exclusive copyright is no longer supported, Tencent Music unconsciously becomes the monopoly in this industry, and saves money by gaining more copyright. In addition, in May and June 2022, Tencent Music successfully gained cooperation with Shidai Fengjun Entertainment. With the help of exclusive copyright of the first 30 days, Tencent Music might gain a huge number of active users and ensuing payments. Jay Zhou’s 520 live music concert also brings a higher user volume. As Jay Zhou will be publishing its new songs in July 2022, we could even predict a new record that Tencent Music will mark. In Q2 2022, we expect Tencent Music will gain a revenue of USD 990 million, with an estimated EPS of USD 0.08.

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7: 360 DigiTech (QFIN: NASDAQ; 360数科)

360 DigiTech (QFIN: NASDAQ) is financial technology platform driven by big data and artificial intelligence. Subsidiary to Fuzhou 360 Financing Guarantee Co., Ltd, 360 DigiTech is one of the top four listed online loan assistance platforms. Looking into its latest financial report, in Q1 2022, 360 DigiTech gained a revenue of CNY 4.32 billion, up 20.3% year-over-year. It also ranked with the highest increase rate over the four platforms mentioned above. The leverage multiple reached 4.2 times, indicating a good sign for the company’s operation.

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There is also much other good news about the company’s next stage of business growth. On June 16, 2022, 360 DigiTech successfully set up its first ABS. This is also the first ABD that provides financial services for small and micro companies. Shenzhen Stock Exchange also approved CNY 4 billion for this establishment of ABS. On June 24, 2022, the 360 DigiTech ecosystem introduced the containerized cloud-native architecture to adopt the IT infrastructure cloud strategy and enhance digital capabilities. Also, 360 DigiTech ranked first in the OCR international competition, bringing Chinese intelligence to a broader area. We believe that 360 DigiTech has become the leader in the digital economy in China. Together with all of the above news, we predict that 360 DigiTech will gain a revenue of CNY 5 billion in Q2 2022, with an estimated EPS of CNY 7.50.

8: Vipshop Holdings Limited (VIPS: NYSE; 唯品会)

Vipshop (VIPS: NYSE) is a Chinese e-commerce company. It specializes in online discount sales. From its Q1 2022 financial report, Vipshop achieved revenue of CNY 25.2 billion in Q1 2022. Under non-GAAP, its net profit was CNY 1.4 billion, with a profit margin of 5.6%. Q1 2022 has been the 38th consecutive quarter of profitability of Vipshop, marking a new record. The GMV was CNY 42.6 billion. The number of its Super V active users increased by 37% year-over-year. 

In Q2 2022, Vipshop also participated in June 18 discount season. This discount season is one of the hottest discount festivals of the year. Even though the detailed order volume has not been released yet, Vipshop published the sales of tents have increased by 128%, and the sales of outdoor-related furniture have increased 100% year-over-year. With the help of this discount season, we believe that Vipshop’s Q2 will have a higher profit than before, marking another new record. We predict that Vipshop achieved a profit of CNY 2 billion in Q2 2022, because of the big sale in June 18 discount season. We predict that Vipshop will gain a revenue of USD 3.40 billion in Q2 2022. The estimated EPS is USD 0.23.

9: Dada Nexus Limited (DADA: NASDAQ; 达达)

Dada is a China-based company that provides local on-demand retail and delivery services. The two sectors of the company are Dada-Now and JD-Daojia. After JD’s increase in its stake in Dada, Dada seems to have more financial and resources support from JD. Dada has also helped JD to open another business line – the food delivery business. In Q1 2022, Dada Group gained revenue of CNY 2.03 billion, up 21% year-over-year compared with CNY 1.67 billion in Q1 2021. The JD-Daojia business section gained revenue of CNY 1.4 billion, up 80% year-over-year. The net loss was CNY 604 million, down 14.92% year-over-year. Comparably, after JD’s larger involvement in the company, Dada narrowed its losses, indicating a good sign. The first ESG report released on June 30, 2022, also brings a better reputation for Dada. The degradable packaging bags follows the trend of protecting the environment, optimizing quality, and improving utilization. 

We believe that Dada could benefit from June 18 Discount season, because this is the biggest event for JD over the year. On June 18 and 19, 2022, Dada’s daily delivery orders reached a record high and exceeded 10 million for two consecutive days. The average daily order volume increased by 264% year-over-year. The number of tea and beverage chain distribution orders increased by 123% year-over-year. Dada also achieved 100% coverage towards Walmart stores. Combining with all these remarkable data, we believe that Dada will have a smaller net loss in Q2 2022. We predict the revenue amount in Q2 2022 will be USD 330 million, with an estimated EPS of USD -0.20, as the delivery services have reached new highs in several categories.

10: MINISO Group Holding Limited (MNSO: NYSE; 名创优品)

MINISO Group provides retail and wholesale businesses of lifestyle and pop toy products. MINISO’s business has grown not only in mainland China, but also overseas. The brands in the company include TOY POP, WOW COLOUR, and MINISO. From Q1 2022 financial report, MINISO gained revenue of CNY 2.34 billion, up 5% year-over-year. The net profit was CNY 111 million, down 25.5% year-over-year compared with CNY 149 million in Q1 2021. We analyze the reason for the decrease are mainly due to the emergent Omicron. Lockdown in several regions might lead to a reduction in retail services. Besides, MINISO might encounter difficulty in breaking through the current dilemma.

We believe that in Q2 2022, MINISO Group will have a better performance, because the COVID-19 influence has become smaller and smoothers in most regions in China. In addition, as of the end of Q1 2022, MINISO had 5113 stores in total, up 10% year-over-year. The overseas stores were 1916. The overseas stores have become increasingly popular because of their high quality and low price. With a warmer macro environment in mainland China and a hotter brand setting in overseas stores, we predict MINISO Group will achieve a revenue of USD 380 million, with an estimated EPS of USD 0.07, returning to the original profit level.