3 Chinese Growth Stocks in Value Territory

Includes: CDCSY, UTRA, XIN
by: Ryan Edward

The collapse of stock prices (as well as faith) in Chinese companies has provided a compelling opportunity. Although a large portion of international money has moved back into large Chinese companies, smaller and more pure-play companies are still in the bargain bin, despite their scorching growth.

The rapid growth Chinese companies have produced or are expected to produce was not the problem during the bubble. In fact, many growth estimates weren't lowered significantly at all. The problem was the price being paid for the growth. Even if many Chinese companies were able to hit their growth targets, some of their stock prices would still languish for the mere fact that they were priced above that growth.

We know that the Chinese economy boom is for real (whether or not there stock prices adequately represent that), so what companies are out there that haven't been discovered?

Below are three companies in which I expect to do very well over the next five years. In my mind, they are perfect for the investor who craves cheap growth. If you would like a more detailed analysis on one in particular, please ask in your post and I will be sure to write one up for you:


Universal Travel (UTA) is a small online travel booking service in China, focusing on two provinces in southeastern China. While facing the duopoly of Ctrip (NASDAQ:CTRP) and eLong (NASDAQ:LONG), UTA is still growing sales at near-20% rates, and the overall Chinese travel market is growing at nearly 15% a year. A 21% earnings yield is quite a cheap valuation for that kind of growth, plus a debt-free balance sheet. On the risk side, the company has been highly dilutive and could have trouble managing their breakneck expansion.


CDC Software (CDCS) is a recent spin-off of CDC Corp (NASDAQ:CHINA) and has been the consistent and primary growth vehicle of CDC for years. The company is trading under six times 2010 profit expectations with over $2 in net cash and revenues slated to grow at 10%. This all translates into a conservative PEG of roughly 0.6. Operating cash flow hit record levels in 2009 and organic license growth for the most recent quarter was just shy of 30%. Top this off with a price to book of around 1x (extremely cheap for a company whose main asset, technology, isn't included in their book value), a price to sales of 1.4 and adjusted EBITDA up 37% year over year


Even with tighter lending practices from the Chinese government, Xinyuan Real Estate (NYSE:XIN) is still going to be moderately cash flow positive. They have closed a 60 million dollar net debt position down to a 5M dollar net debt position and added almost 90M in cash this recent quarter. Even if Xinyuan faced pressure to sell off some of its real estate assets (which a rising GDP and housing market shouldn't lead to) at 70% mark to market it would still put Xinyuan below market value, and it would take at least a year and a half under the worst of circumstances to reach this mark.

So metrically, XIN is trading at 0.44 times book and in even highly skeptical and conservative estimates about 5.5 times 2010's figures while growing at a fairly robust 25% per year. They have ample cash to survive almost any change in the Chinese government's lending practices. This is one case where the news has been rapidly overplayed. It doesn't make sense to pass up XIN at these levels despite the inherent risk which is grossly overstated.

Disclosure: Disclosure: Long CDCS

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