3 Undervalued Chinese Stocks With Higher ROA Than Peers

Includes: GA, RDA, WX
by: Kapitall

China's manufacturing contracted in May, and a recent Quartz article reports that the data indicates the nation's economy is slowing down. As fears pertaining to China's growth continue to rise, it's even more important to perform due diligence when considering stocks. Examining fundamentals and the performance of management can provide more valuable insight into a company. We ran a screen with this in mind.

We began with a universe of Chinese stocks, which we subsequently narrowed down by looking for companies with a return on assets (ROA) above the industry average. We performed a deep dive analysis of the income statements, and balance sheets for companies on our list to calculate the return on assets (ROA). ROA tells us how efficient management is at using its assets to generate earnings. Simply put, ROA shows you the earnings the company generated from invested capital.

Return on Assets = Net Income/Total Assets

We went a step further to look for stocks that appear undervalued relative to earnings growth, with PEG below 1.

The List

For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.

Do you think these stocks will perform well despite China's loss in economic momentum? Use this list as a starting point for your own analysis.

1. RDA Microelectronics, Inc. (NASDAQ:RDA): Designs, develops, and markets radio-frequency and mixed-signal semiconductors for cellular, broadcast, and connectivity applications.

  • Market cap at $454.75M, most recent closing price at $10.71.
  • TTM Return on Assets at 16.2% vs. an industry average at 9.3%.
  • PEG at 0.8.

RDA Microelectronics saw a 34.9% year-over-year increase in its first quarter revenue, rising from $72 million to $97.1 million. Gross margin grew to 32.1% from 35.9% in the first quarter of 2012. The company reported $10.7 million, or $0.22 per diluted American Depositary Share (ADS), in GAAP net income, which is a 23% decrease from the same period last year.

RDA Microelectronics has recorded great gains over the last month in comparison to its closest competitors. Since May 3rd, the stock returned 11.10% since 5/3/13, better than Marvell Technology Group Ltd. (NASDAQ:MRVL) and Broadcom Corp. (BRCM), which returned 1.31% and -0.11% during the same holding period.

The semiconductor manufacturer's low short float - when compared to industry averages- suggests that short sellers see limited downside to the stock. RDA's short float stands at 1.0%, considerably lower than Silicon Motion Technology Corp. (short float at 4.15%, representing 3.03 days of trading volume) and Spreadtrum Communications Inc. (short float at 3.82%, representing 1.74 days of trading volume).

On May 15th, RDA Microelectronics announced that its RDASW36 switch would be used in Samsung's 2G Galaxy Star and 3G Galaxy Pocket Neo smartphones. Both smartphones are expected to be released in the second quarter of 2013 and will be sold in Africa, Asia, Europe, and South America. This development expands the company's presence in Europe as well as emerging markets.

2. WuXi PharmaTech (Cayman) Inc. (NYSE:WX): Engages in providing laboratory and manufacturing services to support research and development for pharmaceutical, biotechnology, and medical device companies.

  • Market cap at $1.44B, most recent closing price at $20.47.
  • TTM Return on Assets at 12.11% vs. an industry average at 5.63%.
  • PEG at 0.49.

In the first quarter of 2013, Wuxi PharmaTech reported a profit of $21.7 million, reflecting a 3.33% increase from $21 million in the same period the year prior. The company's gross margin increased year over year to 36.0% from 35.5%. Year-over-year diluted earnings per ADS also increased, rising 7.2% to $0.30. The company reported $131.9 million in revenue last quarter, a 12% increase driven by $74.5 million in revenue from its China laboratory services

WuXi PharmaTech has delivered a solid performance over the last month, returning 4.97% since May 3rd. The drug-research company's performance has eclipsed the likes of PAREXEL International Corporation (NASDAQ:PRXL) and Covance Inc. (NYSE:CVD) but lags behind ICON plc (NASDAQ:ICLR), which returned 5.76% during the same period.

When looking at valuation ratios, WuXi PharmaTech (Cayman) Inc. appears cheap relative to its competitors. The stock's Price/Cash ratio stands at 6.28. Even on a Price to Free Cash Flow basis the stock looks cheap, with a ratio of 22.79, compared to ICON plc (P/FCF ratio at 25.05) and Covance Inc. (P/FCF ratio at 489.72).

During the first quarter earnings call, CFO and COO Edward Hu stated that Wuxi PharmaTech expects clients to get involved with the company's pipeline projects - such as cell therapy and bio clinical studies - in the second half of the year. As a result, the company expects to see accelerated growth in its U.S. business.

3. Giant Interactive Group, Inc. (NYSE:GA): Develops and operates online games in the People's Republic of China.

  • Market cap at $2.03B, most recent closing price at $8.46.
  • TTM Return on Assets at 24.77% vs. an industry average at 9%.
  • PEG at 0.94.

Giant Interactive Group Inc.'s profit rose by 11.2% to $79 million in the first quarter of 2013. Gross margin fell from 86.7% to 85.6%. Revenue climbed 12.6% to $92.2 million from the same period last year. The company also reported diluted earnings per ADS of $0.22, reflecting a 17.59% increase from last year's $0.19.

Giant Interactive's gains over the last month pale in comparison to those of its competitors. Since May 3rd, the stock has returned 16.37%, trailing Shanda Games Limited (NASDAQ:GAME), which returned 41.58%, and Perfect World Co., Ltd. (NASDAQ:PWRD), which returned 30.21%.

The game developer appears expensive relative to competitors when looking at conventional valuation ratios. The stock's Price/Cash ratio stands at 4.57. Its Price to Free Cash Flow ratio is 13.14, compared to Perfect World Co., Ltd. (P/FCF ratio at 0) and Shanda Games Limited (P/FCF ratio at 0).

In the first quarter, Giant Interactive started rolling out its initial web game, The Sky, on Qihoo 360's web game platform and will expand The Sky to other platforms later this year. For the remainder of 2013, Giant Interactive plans to launch a new web game, Genesis of the Empire, in the third quarter and a mobile game at an undisclosed date. The company is also focusing on overseas expansion by obtaining licensing opportunities to publish foreign titles in China as well as working with foreign publishers on its current and future mobile, PC, and web games.

*Data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.