19 Chinese Stocks That Are Relatively Cheap

China's rapid economic growth will be the global story of the foreseeable future. Like the Japanese in 1980s, the Chinese are shopping for Hummers, IBM PCs, natural resources and real estate.

In addition to growth, many investors look at emerging markets such as China as potential protection against a falling dollar. No one wants to lose money any more after the market crash of last year, but neither can anyone afford to miss out on 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 Co of China	(ACH)	7.9	16.02B	410%
China Petroleum & Chemical Corp	(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 P/Es lower than 18. They seem to be still reasonable 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 finds that adding a significant allocation to commodity 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 and 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 CF	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 CF	0.1	2.1

With higher operating margin and much lower debt load, CHL is clearly in much better position. Also, it doesn’t have huge goodwill sitting in its balance sheet, like AT&T does. Those Goodwill results in AT&T’s negative Net Tangible Assets.

SOHU and SNDA both have much higher growth rate 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 CF	2.4	2.6

ETFs

The following are the main 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 populate one is FXI, which owns 25 mature, state-owned and too-big-to-fail Chinese companies listed in Hong Kong.

Small Cap

Super growth usually comes from small to mid cap. I lowered the criteria to include any profitable Chinese stocks with 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 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 relative inexpensive Chinese companies presented above.

Disclose: I have a long position on CHL. Data is from Google Finance and Yahoo Finance as of Oct 9, 2009.

Comments

[Smallcap Brian]

Have you looked into Chinese companies that are looking to uplist from the OTC-BB? Some of those, (SGZH, JGBO, GRUS (formerly gfre) are trading less than 5 times earnings. Are there any huge red flags there that I may be missing?

2009 Oct 11 08:54 AM

[mbkelly75]

Well done - the research and comparisons give a clear look at the differences. Thanks for your work on this.

2009 Oct 11 12:05 PM

[ArtfulDodger]

Good work Mr. Jin. Thank you very much for putting this together.

Good comparisons.

2009 Oct 11 09:42 PM

[Herewego]

I looked up several of the 19 Chinese stocks that you say are cheap based upon P/E ratios in Yahoo Finance, Google and MarketWatch and none of them had anywhere close to the P/E numbers that you claim. Where do you get your information?

2009 Oct 11 11:27 PM

[eyec]

open your eyes before you claim,P/E are correct to the nearest 1/1000 what more do you want.i thank the author for this article

2009 Oct 12 04:32 AM

[Paul Harper]

nice work, your comparisons have given me a few ideas.

one short addition for me in the ETF/ETN side would be CAF, although not an ETF is trades like one & I like it's Shanghai exposure.

2009 Oct 12 05:29 AM

[Ricard]

You need to look at the annual reports. American websites are notorious for botching up the financials when they're listed in foreign currencies.


On Oct 11 11:27 PM Herewego wrote:

> I looked up several of the 19 Chinese stocks that you say are cheap
> based upon P/E ratios in Yahoo Finance, Google and MarketWatch and
> none of them had anywhere close to the P/E numbers that you claim.
> Where do you get your information?

2009 Oct 12 03:25 PM

[Hao Jin]

Thanks Ricard. Sorry I didn’t disclose data source carefully. Below are full details:

1.I used to use Yahoo Finance only. But as Ricard mentioned, most of Chinese companies data are not ready available in Yahoo site.

2.Then I turned to Google Finance (www.google.com/finance...), which have all those companies’ P/E and market cap, etc.

3.Comparison metrics such as operating margin and debt/operating CF were manually calculated from each company’s financial statements (income statement, balance sheet and cash flow), also from Google Finance. I used Quarterly Data for the last 12 months if it is available. Otherwise used Annual Data instead.

4.ETF data ( such as net assets and P/E) are still from Yahoo Finance ETF center ( finance.yahoo.com/etf/...)


On Oct 11 11:27 PM Herewego wrote:

> I looked up several of the 19 Chinese stocks that you say are cheap
> based upon P/E ratios in Yahoo Finance, Google and MarketWatch and
> none of them had anywhere close to the P/E numbers that you claim.
> Where do you get your information?

2009 Oct 12 09:40 PM

[ArtfulDodger]

Mr. Jin, thank you for the info, but it really ought not be necessary, because every investor should take your and any other authors' recommendations or ideas and follow through with their own research.

2009 Oct 12 11:30 PM

[maelstrom]

Mr. Hao, thank you for your work, it was well donr.

2009 Oct 13 09:03 AM

[bluesky123]

you missed China New Energy Recovery. "CNER"
www.cnegc.com/About%20...

natural gas distributor in northern China. Very fast growth.
Q2 revenues +47%
Q2 gross profit +47%
Q2 gross margin 74%
Excellent CEO with background at Exxon Oil & Gas, Edison Mission Energy (Southen California Utilities), Hong Kong China Light & Power Group; China Tianjin East Ocean Gas as the CEO.

And China just signed a mega natural gas deal with Russia. China runs on natural gas.
www.nytimes.com/2009/1...;hp

2009 Oct 13 11:02 AM

[Chris Lau]

I like your comparative work amongst the companies you recommended.

2009 Oct 13 04:35 PM

[User 499583]

Thank you for a very interesting article. Are you aware that China and commodity bull Jim Rogers has a difference of opinion about direct versus indirect investments in commodities. He points to a study which concludes that investing in the commodities themselves has higher returns than investing in commodity companies. Any thoughts as to the difference in opinion?

2009 Oct 13 05:10 PM

[Dora Doggins]

How can I buy companies like this in the countries currency. Peter Schiff sells stocks so that you also enjoy the currency benefit. But he charges 3 per cent. Someone please educate me.

2009 Oct 15 09:24 AM

[Brian Parks]

Good article, Mr. Jin, but the ETF P/E's on Yahoo are wrong.

Take FXI, which you say has a P/E of 14.6... if you go to ishares.com, the P/E is 24.63 as of 9/30/2009, and therefore closer to 25.98 right now.

Is the P/E on Yahoo a forward P/E? If so, where would they get the estimates from, given that most of the underlying companies in China are not tracked by conventional investment houses?

Personally, I would be very careful taking any P/E information on an ETF from Yahoo. Every single one I've checked has been wrong, including HAO and TAO.

2009 Oct 17 04:25 AM

[sildenafil]

Great work Mr. Jin. Thanks!

2009 Oct 28 05:31 AM