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 Lufax Holding Ltd (NYSE:LU) 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).

A person’s hands typing on a keyboard circling a wealth management platform, symbolizing the company’s cutting-edge technology.

Lufax Holding Ltd (NYSE:LU)

Number of hedge fund owners: 11

Lufax Holding Ltd (NYSE:LU) operates a technology-based private financial services platform and provides personal lending and wealth management solutions. Lufax Holding Ltd (NYSE:LU) was founded in August 2005 and is headquartered in Shanghai, China. The company is well positioned to benefit from its solid financial base and attractive dividend yield. Lufax Holding Ltd (NYSE:LU) remains an attractive investment due to its strong fundamentals and promising prospects.

The company’s latest results for Q1 2024 show positive trends in credit-related metrics and signal an inflection point in new loan volume growth with a +2% quarter-on-quarter increase after seven consecutive quarters of decline. This growth reflects Lufax Holding Ltd’s (NYSE:LU) strategic focus on higher-quality assets, supported by a favorable loan mix increasingly focused on consumer loans. The share of consumer loans in Lufax Holding Ltd’s (NYSE:LU) total new loans increased from 24% to 42% year-on-year, demonstrating the company’s successful diversification away from its core small business segment.

In addition, Lufax Holding Ltd’s (NYSE:LU) increasing take rate, which improved from 7.3% in the fourth quarter of 2023 to 9.0% in the first quarter of 2024, highlights the company’s ability to generate higher returns from its loan portfolio. This is supported by the company’s “100% Guarantee Model,” which provides for a significantly higher take rate of around 14%. As this model gains a larger share of the loan portfolio, Lufax Holding Ltd’s (NYSE:LU) overall take rate is expected to continue to increase, further increasing profitability. Lufax’s dividend prospects are equally compelling, with forecast yields of 8.2% and 8.7% for fiscal 2025 and fiscal 2026, respectively. These conservative estimates suggest that the company’s actual dividend payouts could exceed expectations, particularly as Lufax approaches the upper end of its 20% to 40% payout guidance range. Despite near-term challenges such as the impact of a withholding tax following a special dividend, Lufax is positioned for solid revenue growth and healthy margins in the coming years.

Lufax Holding Ltd (NYSE:LU) trades at a P/E ratio of just 3.3 for fiscal 2025, offering significant upside potential as its valuation could still rise given its strong dividends and improving financial metrics. This makes Lufax an attractive buy for investors seeking value and income in the personal financial services space. In the second quarter of 2024, 11 hedge funds held positions in Lufax Holding Ltd (NYSE:LU), up from 17 in the previous quarter, according to Insider Monkey’s database. The total value of these holdings is approximately $34.38 million. Christopher Wang’s Yunqi Capital held the largest share of these hedge funds during this period.

Total LU 3rd place on our list of cheap Chinese penny stocks to buy. While we recognize LU’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 LU 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.