The United States may have been in a recession with negative economic growth since December 2007, but China still expects to hit its economic growth target of 8 percent in 2008. Meanwhile, the country joined with leaders of South Korea and Japan in the first Asian economic summit designed to explore ways to help the region play a role as the center of world economic growth.
Despite the positive growth, the Chinese stock market has plunged more than 60 percent so far this year, compared to a 39 percent drop in the U.S. stock market. China may not have experienced single digit economic growth for six years, but the country’s economy is still quickly expanding as many western economies head into recession. So, how can investors take advantage of this differential?
China Mobile Ltd.
With over 399.5 million subscribers, China Mobile Ltd. (CHL) is the largest provider of mobile telecom services in China with service in 31 Chinese provinces, autonomous regions and directly administered municipalities in Mainland China and Hong Kong. Currently, the firm is trading at a price-earnings multiple of 13.87x despite posting 44.7% quarterly growth, according to Yahoo! Finance.
Surprisingly, the earnings multiple for China Mobile is lower than that of U.S. counterpart Verizon Communications (VZ) despite a sharply higher growth rate, high profit margins, and larger potential market. In fact, the majority of Verizon’s mobile growth in recent times comes from its recent acquisition of regional mobile provider Alltel, while China Mobile’s growth is primarily organic.
The internet search boom may have been put on hold in the United States, but Chinese online search (and internet usage) is just getting started. The state-run China Internet Information Center reported earlier this year that China had surpassed the United States as the nation with the largest number of internet users. In fact, China increased its internet users in one year by 73 million while the total number of U.S. users is estimated to be just 215 million.
Baidu.com (BIDU) dominates the Chinese search market the way Google (GOOG) dominates the U.S. market. The firm has over 60% market share and even Google admits it would be difficult to compete. Google’s Kai-Fu Lee noted, “Gaining share against a well-established supermajority competitor is a difficult proposition because there is a certain critical mass, economy of scale and word-of-mouth effect that one has to overcome.”
Baidu.com is currently trading with a price-earnings multiple of just 27.79x despite its strong 91.4% quarterly growth, according to Yahoo! Finance. This compares to Google’s 19.87x earnings multiple with quarterly growth of just 20.6%. China also has a positive economic growth, which comes in sharp contrast to the United States where Google operates.
iShares China ETF
Investors looking to place a bet on the broader Chinese economy may want to take a look at the iShares FTSE/Xinhua China 25 Index (FXI) ETF. The fund holds the top 25 largest Chinese companies, including China Mobile, PetroChina (PTR), China Construction Bank (CICHF.PK) and other large names. Currently, the entire index has a price-earnings ratio of just 8.42x despite continued growth in the Chinese economy.
Investors looking for a relatively safe leveraged bet on the Chinese economy may want to take a look at long-term options on the ETF known as LEAPS. Currently, investors can purchase $30 January 2011 calls for just $8.40 per contract. This means that investors can pay just $840 now for the rights to 100 shares of FXI at $30 per share anytime during the next 760 or so days.
For more information see “Using LEAPS as a Stock Substitute.”
Disclosure: No position in stocks mentioned.