We recently published a list of 7 cheap Chinese penny stocks to buy, according to hedge funds. In this article, we take a look at how iQIYI, Inc. (NASDAQ:IQ) compares to other cheap Chinese penny stocks.
As China pursues its ambitious economic goals for 2024, undervalued investment opportunities, particularly Chinese penny stocks, are increasingly coming into focus. Often overlooked by mainstream investors, these low-value stocks are gaining traction among hedge funds as they offer significant upside potential in a rapidly changing economic environment. China’s economic development has attracted global attention, particularly in the wake of recent discussions at the World Economic Forum’s 2024 New Champions Annual Meeting. Premier Li Qiang highlighted the enormous potential of the Chinese market in his speech to global leaders gathered in Dalian. “China’s big market is open,” he declared, underscoring the country’s commitment to harnessing new industries and technological advances to drive economic growth. Despite the recent slowdown, there is optimism that the country’s ambitious 5% growth target for 2024 can be achieved.
World Economic Forum discussions reflected a consensus on the critical role of new growth avenues and high-quality development. As China transitions from a period of rapid growth to one of high-quality growth, industries such as artificial intelligence, digital financial services and green technologies will play a critical role. This shift will be supported by significant investments in clean energy and research and development, areas where China is already making significant progress. Hedge funds, recognizing the potential for high returns in this developing market, are turning their attention to Chinese penny stocks. These stocks, characterized by their low prices and high volatility, offer a unique opportunity for investors willing to manage the risks associated with emerging markets. The attractiveness of these investments is enhanced by China’s commitment to innovation and growth in key sectors, which could translate into significant gains for early investors.
In a recent podcast episode, Morgan Stanley’s Laura Wang and Robin Xing discussed their forecast for the Chinese economy and equity markets in 2024. Wang, chief China equity strategist, and Xing, chief China economist, highlighted that China’s recovery after reopening in 2023 was disappointing, and it faced significant challenges in housing and local government financing. Xing noted that China is struggling with “3D problems” – debt, deflation and demographics. Despite some progress in reflationary measures, the recovery remains uneven, and economic stability may take time to achieve. To avoid a debt-deflation loop, Xing proposed a comprehensive 5R action plan: reflation, rebalancing, restructuring, reform and revitalization. This plan includes reviving the economy, reorienting it towards consumption, restructuring troubled sectors, reforming state-owned enterprises and revitalizing the private sector. Currently, only about 25% of this plan has been implemented, but it is expected to reach 50% by the end of 2024.
On demographics, Xing pointed out that China’s ageing population is likely to dampen growth, with labor shortages expected to reduce GDP growth by 40 basis points annually from 2025 to 2030. However, efforts to improve labor quality and revive private sector confidence could help mitigate these impacts. Looking ahead, Morgan Stanley forecasts a modest rebound in GDP growth in 2024, expecting real GDP growth to pick up slightly to 4.2% and the GDP deflator to recover to 0.6%. Challenges remain, particularly in stabilizing aggregate demand and managing housing and municipal debt. Monetary policy is expected to remain accommodative, with interest rate cuts expected. As for Chinese equities, Wang expects a largely range-bound market with limited upside, forecasting the MSCI China index to reach a target of 60 by the end of 2024. Although there are headwinds to corporate earnings, opportunities for high-quality investments in growth sectors remain. Wang recommends investors focus on high-quality names with strong earnings and good management that can provide downside protection and upside potential when market conditions improve.
In this article, we examine seven Chinese penny stocks that are currently attracting interest from hedge funds. These stocks are considered promising because they align with China’s strategic economic goals and have the potential to benefit from the country’s evolving market dynamics. This research will not only highlight the potential returns, but also provide a deeper understanding of the investment landscape in China’s rapidly developing economy. As China continues to explore new avenues for growth and innovation, the opportunities in its penny stock market are becoming increasingly clear.
Our methodology
For this article, we first used a stock screener to list all Chinese penny stocks (under $5) with a P/E ratio below 20. We then selected 7 of these stocks with the highest number of hedge fund investors. We determined hedge fund sentiment for these stocks using Insider Monkey’s database of 912 hedge funds. The stocks mentioned in this article are penny stocks, so the number of hedge funds bullish on these stocks is small.
At Insider Monkey, we’re obsessed with the stocks hedge funds invest in. The reason is simple: Our research shows we can beat the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (read more details here).
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iQIYI, Inc. (NASDAQ:IQ)
Number of hedge fund owners: 17
iQIYI, Inc. (NASDAQ:IQ), a leading player in China’s video streaming market, presents an interesting investment opportunity despite recent mixed signals. The company’s strategic adjustments and focus on long-term growth underscore its potential for future earnings. Although iQIYI, Inc. (NASDAQ:IQ) revenue declined 5% year-over-year in the first quarter of 2024, the company’s strategy shift toward long-term membership revenue is a positive development. By prioritizing higher-value, loyal subscribers over short-term metrics such as subscriber count and average revenue per member (ARM), iQIYI, Inc. (NASDAQ:IQ) is positioning itself to improve its revenue sustainability over the long term. This approach should attract more loyal subscribers and potentially increase revenue quality.
In addition, iQIYI, Inc. (NASDAQ:IQ)’s operating margin of 11.9% in Q1 2024 exceeded market expectations, demonstrating the effectiveness of its cost management strategies. The company’s commitment to optimizing marketing spend and reducing content costs through AI integration demonstrates its proactive approach to increasing profitability. This focus on operational efficiency will likely lead to further improvements in profit margins, thereby boosting overall financial performance.
Despite competition from fast-growing short-form video platforms, iQIYI, Inc.’s (NASDAQ:IQ) strategic investments in content and technology are well-positioned to strengthen its market position. The company’s ability to adapt and innovate, coupled with its disciplined approach to cost control, sets the stage for continued profitability growth. iQIYI, Inc.’s (NASDAQ:IQ) current challenges are offset by its strategic focus on long-term revenue growth and operational improvements. The stock’s valuation at a P/E ratio of 8.6 appears attractive given the company’s potential for future profitability improvements.
The number of hedge funds in Insider Monkey’s database owning shares in iQIYI, Inc. (NASDAQ:IQ) increased to 17 in the second quarter of 2024, compared to 15 in the previous quarter. The consolidated value of these shares is nearly $148.21 million. Among these hedge funds, Thomas Steyer’s Farallon Capital was the largest shareholder of the company in the second quarter.
Overall IQ 2nd place on our list of cheap Chinese penny stocks to buy. While we recognize IQ’s potential as an investment, we believe some AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than IQ but trades at less than 5x earnings, read our report on the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
