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 Zhihu Inc. (NYSE:ZH) 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.

The story continues

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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Zhihu Inc. (NYSE:ZH)

Number of hedge fund holders: 08

Founded in 2010, Beijing-based Zhihu Inc. (NYSE:ZH) operates an online content community in China. The platform allows users to find inspiration, solve problems, make decisions and have fun. Zhihu Inc. (NYSE:ZH) also provides technology, business support, consulting, information transfer, software, IT and Internet services. In addition, the company provides marketing services and professional training and has an audio-visual license.

Zhihu Inc. (NYSE:ZH) is emerging as a leader in China’s content-driven online community. Its strategic focus on AI and high-quality content creation drives user engagement and positions the company for profitability. The first quarter 2024 earnings report shows significant progress, with Zhihu Inc. (NYSE:ZH) reporting gross profit margin growth for the sixth consecutive quarter. This success comes from optimizing cost structures, reducing labor and user acquisition costs, and emphasizing high-return segments such as paid memberships and professional training. The company’s unique content ecosystem encourages active participation, making Zhihu Inc. (NYSE:ZH) a pioneer in exploring new business models in the AI ​​era. This shift has led to increased user engagement and a significant increase in content creators’ revenue on the platform. Vocational training revenue grew 35.9% year-over-year, demonstrating Zhihu Inc. (NYSE:ZH)’s ability to capitalize on emerging trends such as AI-driven courses.

The integration of AI into Zhihu Inc.’s (NYSE:ZH) content moderation and user engagement further increases efficiency, reduces operating costs and expands monetization opportunities. The company’s success in leveraging AI for operational improvements and new business ventures positions it well for sustainable growth in China’s digital content landscape. In summary, Zhihu Inc.’s (NYSE:ZH) strategic advances in AI, cost optimization and monetization, combined with strong community engagement, make the company an attractive investment with a clear path to profitability and long-term growth.

In the second quarter of 2024, the number of hedge funds holding positions in Zhihu Inc. (NYSE:ZH) increased to 8 from 5 in the previous quarter, according to Insider Monkey’s database of 912 hedge funds. These holdings total around $0.83 million. Phil Frohlich’s Prescott Group Capital Management emerged as the largest shareholder among these hedge funds during this period.

Total ZH 7th place on our list of cheap Chinese penny stocks to buy. While we recognize ZH’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 ZH but trades at less than 5 times its earnings, read our report on the cheapest AI stock.

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Disclosure: None. This article was originally published on Insider Monkey.