The Top 20 Chinese Value Stocks

By Hao Jin

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 (IBM) PC's, 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 on the potentially huge growth ahead. Money is flying back in to Chinese stocks, causing valuations to rise rapidly. Are there still windows of opportunity left?

I went though all of the Chinese stocks listed on U.S. stock exchanges with a 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. Of these top nine inexpensive stocks, three are in the commodity, technology and railroad sectors.

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 commodity-related 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 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 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. Below is its stock price chart over the last 2 years.

Click to enlarge:

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 rise 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 investment 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.

Original article

Comments

[Darren Jiang:]

This is great stuff. How do I get P/E ratio of ETF?

Oct 14 04:55 AM

[Hot Richard:]

Same author: Hao Jin. He can't rip himself off, can he?

Oct 14 10:54 AM

[mws:]

Plagiarism is a pretty "heavy duty" accusation... (even after a quick and convenient recantation). Perhaps you should consider leaving such an accusation up to the discretion of the original author himself/herself.


On Oct 14 10:52 AM Ricard wrote:

> Never mind...I recant my comment.

Oct 14 11:23 AM

[Moldmaker 1:]

I have invested in FHKCX,Fidelity Mutual Fund,and have done very nicely. But you have to watch and do your homework,remember this is still a cummunist country,and the government runs it,and U.S. is starting to do the same thing.

Oct 14 11:32 AM

[manuel:]

sorry can you tell me what Stock screener you use?

Oct 14 01:34 PM

[Stone Fox C...:]

Interesting comparison on the railroads. Operating margin is important, but so is growth. I'd think GSH has alot more growth ahead versus BNI.

Oct 14 04:48 PM

[Stone Fox C...:]

also, its interesting to note the relatively low PE ratios of the companies listed in Hong Kong or the US. So many people hear the quotes of 30+ PE for the local markets in China and confuse that with the ADRs/ETFs listed in the US. The ones trading here are very reasonable. Even BIDU after shotting up 300% still only trades at 1x its growth rate of around 40. Getting expensive but not outrageous.

Oct 14 04:52 PM

[bobbybutte:]

The concept of the article is well done

However a more efficient way to play the Chinese market is through large cap US multinationals that are active there IMO

Oct 15 07:00 AM

[nautilus508:]

Hey bobbybutte - you are a stuck record with your "most efficient play ....is through large cap US multinationals...." Over and over and over in article after article. Think of something else to say ---PLEASE!!!

Oct 17 04:05 PM

[User 42017:]

Chinese stocks with market caps under $1 billion offer good opportunity as well. Here are some with single digit P/E ratios (per Yahoo Finance) and average share volume over 100,000: WH (4.9) SUTR (5.9) CSR (6.3) GIGM (6.6) AOB (6.6) CMFO (8.6) CHBT (8.8) ABAT (9.7) FEED (9.8)

Nov 01 01:08 AM