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Chinese Value Stocks!
China's rapid economic growth will be the global story of the foreseeable future. Like the Japanese in 1980s, the Chinese are shopping for Hummer, IBM PC division, natural resources and real estate, etc. In addition to growth, Many investors look at emerging markets such as China as potential protection against falling dollars. No one wants to lose money any more after the market crash of last year, but neither can anyone afford to miss out potential huge growth ahead. Money is flying back to Chinese stocks causing valuations to rise rapidly. Are there still windows of opportunity left? I went though all Chinese stocks listed in U.S. stock exchanges with market cap greater than $1 billion. Below are 19 with positive P/Es (sorted by P/E): Name Symbol P/E Mkt cap % Chg. From 52wk Low Aluminum Corp of China (ACH) 7.9 16.02B 410% China Petroleum & (SNP) 9.7 76.75B 191% Yanzhou coal mining (YZC) 11.1 7.47B 376% China Mobile Ltd (CHL) 12.2 199.92B 145% PetroChina Co Ltd (PTR) 13.6 221.75B 215% Sohucom Inc (SOHU) 14.6 2.47B 189% CNOOC Limited (CEO) 15.3 65.35B 264% Shanda Interactive (SNDA) 15.5 3.22B 243% Guangshen Railway (GSH) 17.7 2.97B 161% NetEasecom, Inc (NTES) 20.1 5.23B 270% Perfect World Co, Ltd (PWRD) 20.7 2.15B 497% Trina Solar Limited (TSL) 26.1 1.03B 618% Mindray Medical Intl (MR) 29.0 3.24B 244% SINA Corp(USA) (SINA) 32.8 2.08B 216% China Life Insurance (LFC) 40.6 129.73B 206% New Oriental Edu (EDU) 52.0 3.14B 217% Ctripcom Intl, Ltd (CTRP) 57.4 4.14B 377% Baidu, Inc (BIDU) 83.4 14.61B 420% Home Inns & Hotels (HMIN) 108.8 1.34B 483% The top 9 stocks in the list have a P/E ratio of less than 18. They seem to still be reasonably priced, even though some of them have bounced back more than 400% from their 52-week-lows. These 9 inexpensive stocks are in 3 sectors: commodity, technology and railroads. Commodity ACH, SNP, YZC, PTR and CEO are all commodity related. Although the worst is likely behind the commodity sector, weakness might persist as long as excess supply does. A study published in Journal of Investing, spring 2009 issue found that adding a significant allocation to commodities substantially improves portfolio performance. The performance is more dramatic for indirect investment via the equities of companies than for direct investment in the commodities themselves. Gold consistently provides a greater benefit than either platinum or silver. The findings are consistent during much of the 34-year study period. Below are comparisons between Chinese oil & gas stocks to Exxon Mobil Corp (XOM). As you can see, Chinese oil giants don’t have a clear advantage over Exxon Mobil: Metric SNP PTR CEO XOM P/E 9.74 13.6 15.2 11.2 Operating Margin 5% 15% 40% 15% Debt/Operating Cash Flow 3.1 1.0 0.3 0.2 Technology China Mobile Ltd (CHL) is a Chinese mobile-phone providers that has a huge cash stockpile it can use to continue expand. Below are comparisons between CHL and AT&T (T): Metric CHL T P/E 12.2 12.7 Operating Margin 33% 18% Debt/Operating Cash Flow 0.1 2.1 With a higher operating margin and a much lower debt load, CHL is clearly in a much better position. Also, it doesn’t have huge goodwill sitting in its balance sheet, like AT&T does. The Goodwill results in AT&T’s negative Net Tangible Assets. SOHU and SNDA both have much higher growth rates than CHL, though they also have higher short ratios. Railroads Below is a comparison between Guangshen Railway (GSH) and Burlington Northern Santa Fe Corp. (BNI). No wonder Warren Buffett prefers BNI. Metric GSH BNI P/E 17.6 14.0 Operating Margin 14% 24% Debt/Operating Cash Flow 2.4 2.6 ETFs The followings are mainly China related ETFs/ETNs, including short and currency: Fund Name Ticker Net Assets Portfolio P/E iShares FTSE/Xinhua China 25 Index FXI 11.30B 14.6 SPDR S&P China GXC 455.46M 17.0 PowerShares Gldn Dragon PGJ 439.50M 16.1 UltraShort FTSE/Xinhua China25 FXP 269.93M Claymore/AlphaShares China Small Cap HAO 182.13M 15.4 WisdomTree Dreyfus Chinese Yuan CYB 136.81M Claymore China Real Estate TAO 79.43M 16.0 The most popular one is FXI, which owns 25 mature, state-owned and too-big-to-fail Chinese companies listed in Hong Kong. Small Cap Superior growth usually comes from small to mid-cap stocks. I lowered the criteria to include any profitable Chinese stocks with a market cap greater than $100 million. Jinpan International Ltd. (JST) engages in the design and manufacture of cast resin transformers for voltage distribution equipment in China. Its P/E is 9, PEG is 0.56, debt/operation cash flow is less than 1, and short ratio is very low. However, the market cap is only $250M. Conclusion Investors usually have short-term memories. We seem to be driven by the most recent market rally, conveniently forgetting the lessons of last year. Hot markets eventually cool, and most investors don't catch on until it's too late. Investors do have a habit of buying hot stocks. If a stock can be up 400% over the last 12 months, it could also be down 75% in the next 52 weeks. However, if you can tolerate this kind of risk, and have a very long invest horizon, you might want to consider these profitable and still relatively inexpensive Chinese companies presented above. Disclosure: I have long position on CHL. Data is from Google Finance and Yahoo Finance as of Oct 9, 2009. Stocks: ACH, BIDU, BNI, CEO, CHL, CTRP, CYB, EDU, FXI, FXP, GSH, GXC, HAO, HMIN, JST, LFC, MR, NTES, PGJ, PTR, PWRD, SINA, SNDA, SNP, SOHU, T, TAO, TSL, YZC, XOM Article Directory: http://www.articledashboard.com Hao Jin, CFA Contributing Writer |
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