14 Promising Chinese Dividend Stocks

In 1995, NASDAQ was trading around 1000. On 3/10/2000, it hit a peak of 5048. Such euphoria had not been seen since the railroad boom of the 1840s or the automobile boom of the 1920s. Now it is China’s turn.

Last quarter China grew at a brisk 8.9% rate thanks to the government’s aggressive stimulus. The following are 14 Chinese stocks trade in the U.S. exchanges and have dividends over 2%:

14 Chinese Dividend Stocks

Name (Symbol)	Sector	Mkt Cap	Yield	P/E	Forward P/E
CHINA MOBILE (CHL)	Telecom	192.55B	3.5%	12	n/a
CHINA PETRO&CHEM (SNP)	Energy	76.60B	2.3%	10	8
CNOOC LTD ADS (CEO)	Energy	72.39B	2.8%	17	10
GUANGSHEN RAIL (GSH)	Railroad	3.07B	2.2%	18	n/a
PETROCHINA CO ADS (PTR)	Energy	237.01B	2.5%	16	11
YAZHOU COAL MNG (YZC)	Energy	9.01B	2.9%	13	n/a
China Medical Tech (CMED)	HealthCare	480.32M	3.6%	n/a	9
CHINA NEPSTAR ADS (NPD)	HealthCare	772.72M	4.7%	39	34
CHINA TELECOM CP (CHA)	Telecom	37.05B	2.1%	n/a	20
GIANT INTERACTIV (GA)	Online Game	1.62B	2.5%	13	12
GUSHAN ENV EGY ADS (GU)	Basic Mat	117.73M	9.4%	n/a	140
HUANENG POWER (HNP)	Utilities	7.93B	2.1%	n/a	11
NOAH EDUCATION (NED)	Education	233.17M	9.7%	15	n/a
WSP HOLDINGS LTD (WH)	Basic Mat	411.58M	7.3%	5	n/a

I discussed the first 6 stocks (CHL, SNP, CEO, GSH, PTR and YZC) in my Oct 11 article. The 8 new stocks are mainly in healthcare, telecom and utilities sectors.

Health Care

New medical product development is both costly and labor-intensive and has a very low rate of successful commercialization. Companies that have to spend heavily on R&D have an inherent flaw in their competitive advantage that will always put their long-term economics at risk.

As a small cap, CMED’s operating results have fluctuated in the past and may continue to fluctuate significantly from time to time. I followed this stock since summer 2007, when it appeared on the top 100 list of Investor’s Business Daily. The following are comparisons between CMED, Johnson & Johnson (JNJ) and Alcon (ACL), the biggest medical instruments supplier by market cap:

Metrics	CMED	JNJ	ACL
Trailing P/E	n/a	13.4	22.1
Forward P/E	8.9	12.5	19.6
Operating Margin	17%	27%	37%
Debt/Operating Cash Flow	5.8	0.8	0.3
Yield	3.6%	3.2%	2.4%

As a result of acquisitions of the ECLIA, FISH and SPR technologies and BBE business, 59% of CMED’s total assets are intangible assets and goodwill. Earnings could be adversely affected if the company chooses to recognize impairment losses. Nonetheless, with plenty of cash on hand, CMED might be benefit from lucrative and profitable health care market in China.

NPD has 2700 drugstores providing pharmacy services. Its P/E is too high, though.

Telecom

Competition is intensifying for China's major telecom operators as the government granted 3 third-generation mobile licenses. CHL experienced a slowdown in profit growth recently, while rival CHA’s net profit fell due to higher marketing expenses costs to attract customers to its newly acquired cellular business.

Electric Utilities

China has increased its appetite for coal power. Barron’s projects that coal usage will increase 55% in the next 15 years. Variable coal spot prices, possible tariff adjustments along with rising power production nationwide make HNP’s future uncertainly. Followings are its dividend history and comparison with top 2 U.S. electric utilities: Southern Company (SO) and Dominion Resources (D):

Metrics	HNP	SO	D
Trailing P/E	n/a	15.7	12.9
Forward P/E	11.0	12.9	11.1
Operating Margin	-2%	22%	25%
Debt/Operating Cash Flow	7.6	6.3	4.3
Yield	3.6%	5.5%	4.8%

Hong Kong & Taiwan Dividend Stocks

Name (Symbol)	Sector	Mkt Cap	Yield	P/E	Forward P/E
CHUNGHWA TEL (CHT)	Telecom	19.15B	11.0%	12	14
CHINA UNICOM (CHU)	Wireless	32.87B	2.1%	23	26
City Telecom (CTEL)	Telecom	271.80M	5.6%	14	n/a
Himax Technologies (HIMX)	Semi	224.76M	11.7%	9	9
TAIWAN SEMICOND (TSM)	Semi	54.86B	3.5%	26	15

CHT is Taiwan's principal telecom service provider. Recently it announced a $1 million investment in mainland China. CHU’s new iPhone launch wasn't catching on with consumers as expected. TSM just reported big sequential gains in revenue and earnings. These latest results might be the beginning of a broader rally.

Followings are their annual dividend histories:

ETFs

Fund Name	P/E	Net Assets	Yield
MSCI Emerging Markets Index (EEM)	21.6	36.7B	1.5%
FTSE/Xinhua China 25 Fund (FXI)	24.7	9.7B	1.2%
MSCI Taiwan Index (EWT)	28.3	3.4B	5.1%
MSCI Hong Kong Index (EWH)	26.6	1.9B	3.4%

iShares.com’s data shows all those 4 ETFs trailing P/E are over 20. As you can see from the chart below, over the last 12 months they moved in the same direction:

Both EWT and EWH offer much higher dividends than FXI and EEM:

Conclusion

China's export markets are tapped out. Its domestic consumption hasn't started to rise significantly. Yet the Shanghai stock market is trading at 30 times trailing P/E and 20 times forward earnings. According to Lawrence McDonald, author of A Colossal Failure of Common Sense, you can’t model human behavior with computer. When a high rolling market goes wrong, history tells us it happens with lighting speed, as everyone stampedes for the door at the same time.

However, for long term income investors, the key is to find fundamental sound blue chips with low P/E and consistently paying solid dividend. In addition to ADRs, foreign investors can invest in Shanghai Stock Exchange’s B-shares or H-shares from the Hong Kong Exchange. They usually trade at a discount to their A-share listings.

Disclosure: I have long positions on CHL and EEM. Data are from SEC Filings, iShares, Google and Yahoo Finance as of November 13, 2009.

Comments

[notsosmart:]

can the hong kong market be trusted? not a wise guy political question. i really dont know enough about the asian stock markets & cant afford to lose much.thanx

Nov 15 10:29 AM

[mbkelly75:]

Another nice article with some good ideas for more DD. Your last paragraph in the conclusion puts it very well. The only thing I would change is the term "blue chips" as any stock with sound fundamentals and low PE can make a good investment. I look at PEG rather than PE and the P/S Ratio can be a huge help in understanding if an individual stock is overvalued or undervalued. Once again - thank you for your work.

Nov 15 11:45 AM

[Dividend Gr...:]

It seems to me that chinese stocks could do well over time, however i don't know whether the picks you have selected are mature enough to be considered "dividend plays". Before you consider investing in dividend stocks for reasons other than current yield, ask yourself the following questions?

How do you factor in the different share classes for chinese stocks?

Are dividends sustainable?

Are companies' earnings in a position to grow so that they could support a growing dividend?

Is there a long history of consistent dividend increases ( at least a decade)?

Another issue with chinese stocks could be that if you end up overpaying for their growth now, you could suffer from getting below average returns for at least one decade. It seems that many investors are simply following the theme of "what's hot now", versus what you be a wealth builder for the future. Chinese stocks look speculative to me right now, although in a few years I could definitely reconsider them.

If you really want to get involved with emerging markets, buy of US's large multinationals which have globally diversified revenue streams. In fact the ten of the largest US stocks by market cap of the S&P 500 receive almost half of their revenues internationally.

Nov 15 01:42 PM

[Low Sweat I...:]

I enjoyed this article. I will only buy stocks that have a history of rising dividends, and believe good dividend stocks in emerging Asia are an important component of a diversified portfolio. I prefer ADRs that must meet disclosure and listing requirements of U.S. exchanges.

I own CHL, and believe it is probably a very good candidate for sustained increases in its regular dividend.

CHL did hold its payout ratio steady at 43% during 2009, knowing this would result in a flat dividend payment. Earnings and the dividend increased only about 1% in the first half, in local currency.
Though disappointing, it’s been tough year for dividends in general.

In discussing the flat 2009 payout ratio, however, CHL reiterated its commitment to a long-term “steadily rising” dividend as an important component of creating shareholder value. That’s what I like to see.

And given their potential for continued business growth, it seems very likely CHL will be able to deliver on their dividend growth intentions.

As far as political questions, no doubt politics add some risk. But economically, China is an enthusiastic global capitalist, so as an investor I am willing to accept the risk in exchange for the growth potential.

Those who want a tamer way to play China might look at Australia, where miners like BHP sell loads of raw materials to China for its infrastructure build-out. BHP has a ‘progressive’ policy of dividend increases throughout the commodity cycle. Also Australian banks, such as WBK, benefit from local growth fueled by Asia’s proximity. WBK did trim its dividend this year, but has a long record of increases.

BHP yields about 2.2%; WBK yields over 4%; I own both of these, in addition to CHL.

Thanks for this article.

Nov 15 03:09 PM

[notsosmart:]

thanx for these answers

Nov 15 04:21 PM

[YoYoMama:]

The problem with many Chinese ADRs as dividend plays is that most pay only on a once-a-year basis. Since the dividend is normally declared only a month in advance, you simply do not know what yield you are buying into when accumulating the other 11 months of the year. There is always the risk the yield will be "0".

Yet I have also found that when the dividend is declared, the price spikes, then falls immediately after the ex-date. In the case of HIMX, the stock seems to depreciate continually until the next dividend announcement. So you really are not getting a great deal by waiting to buy until the dividend is announced either!

Chinese ADRS, IMHO, are best for long-term holds on capital appreciation, with the dividend as a nice bonus on appreciation. But as dividend plays, one should probably think twice before adding into a classic dividend portfolio.

Nov 16 10:39 AM

[YoYoMama:]

Agreed, and I would add that EM bonds provide higher yields, more frequent payouts, and a safer play that EM equities. PCY, EMB, AWF, GHI, GIM, TEI, CH, FAX and ESD are tickers to look at. Many of these provide increasing dividends, some are monthly payers.

On Nov 15 01:42 PM Dividend Growth Investor wrote:


> If you really want to get involved with emerging markets, buy of
> US's large multinationals which have globally diversified revenue
> streams. In fact the ten of the largest US stocks by market cap of
> the S&P 500 receive almost half of their revenues internationally.

Nov 16 10:42 AM

[User 41022:]

wh is very cheap now
good dividend at book value
should appreciate 50%,plus

Nov 16 12:08 PM

[bbowen7:]

This is a very helpful article and thread. Thank you.

Nov 16 04:14 PM

[MarvinMBA:]

I'm not farmiliar with all of the stocks except Nepstar which owns more drug stores than anyone and is on a rising star. NPD is the symbol and I own a few shares...MarvinMBA

Nov 16 04:30 PM

[User 501963:]

Thanks for your outlook on CMED. I like your skeptical approach. My affinity for this company is based on product mix, costs, and market. Their costs will be lower than the competition, and they will be able to customize analytical equipment for the China market. Furthermore, their regulatory hurdles may be lower. They are developing lots of market and medical data specific to China market. I envision a good possibility for them to develop a deep, alligator-filled moat. However, your concerns are well-founded and I will consider them carefully before growing my position.

Thank you for your analysis.

Nov 17 10:06 AM

[BigOlDave:]

The Himax Technologies (HIMX) stock price has, indeed, been a disappointment for the long-term holder. But the price changes do NOT go lock-step with the dividend payout. Pop up a chart with the dividend payments and see for yourself.

HIMX's Chinese managers are educated in the U.S. and look like a savvy group. They have a good record of managing a maturing constellation of products, but the latest Q report indicates new business coming on-stream.

At the current price ($2.42/ADR), this is a good stock to fill in the cracks if you have some idle cash. I think the June 2010 dividend will be down to $0.25 -- but that's still 10%, with excellent upside potential.

I've doubled my position on the recent price slide.

Nov 17 05:54 PM