Which China-based stock could be the next Baidu (BIDU) in terms of returns? This is a tough question to answer. To try and find some possible answers, it makes sense to consider some of the following points. Baidu and other Chinese stocks like Focus Media (FMCN) and 51Job (JOBS) weren't always so well respected on Wall Street.
When I first bought BIDU shares years ago for about $6.70 per share the shares traded at a relatively low PE ratio and the shares were knocked around severely by analysts for every concern one could imagine, especially after they reported earnings. Meanwhile Google (GOOG) shares were favored by analysts and for some time BIDU shares did not get the respect they deserved. That has all changed now, and BIDU shares have exploded upward, now trading for over 50 times earnings while GOOG shares trade for less than 20 times earnings.
JOBS trades for just over $63 per share. For a few years, JOBS floated between about $10 to $20 per share as few investors or analysts took notice of the company which operates a employment website in China. But, since January, 2010, the stock has exploded from under $20 per share to a high of about $64 recently. JOBS earnings estimates are around $1.80 for 2011. Check out the chart for JOBS below, which shows how this stock has soared:
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Now let's look at Focus Media, which traded below $10 through most of 2009 and for around $10-$12 for a good part of 2010. Since January, 2010, the stock has exploded from around $12 per share to a high of about $30 recently. FMCN earnings estimates are around $1.46 for 2011. The chart below shows the surge in FMCN shares.
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Click to enlarge
I bring up BIDU, JOBS and FMCN to show that all these stocks were disrespected, undervalued and languished for a good period of time before they surged. I have followed a number of stocks, which like these former bargains are currently languishing, undervalued and in my opinion are under appreciated by the investment community. When investors take a favorable view toward a stock it often results in a multiple expansion which can be a very powerful force in creating extraordinary gains. A stock with $1 per share in earnings that is out of favor might sell for a price earnings multiple of 8 which gives it a $8 stock price. But that same stock selling at 20 or 30 times earnings after the market discovers it or appreciates it fully can turn that $8 stock into a $20 or $30 stock.
According to estimates, Perfect World (PWRD) will earn $2.49 per share for 2011, about the same per share as BIDU which is at $2.48 and yet PWRD trades for $21.68 and BIDU trades for over $137 per share. This stark difference can show you where the values are now, and shows the potential valuations when stocks become well known and highly favored by investors.
I believe the solar names below have huge potential due to their growth and low PE ratios. As for the other picks like Perfect World and Dangdang (DANG), I selected them because of their growth, exposure to the Internet and consumers in China. Here are my candidates for the next Baidu in terms of potential returns over the next few years:
LDK Solar (LDK) is trading at about $12.38. The 50 day moving average is $12.66 and the 200 day moving average is $9.98. LDK has very strong earnings and based on guidance from the company, it appears they could earn over $3 per share in 2011. This puts the PE ratio at about 4 which is extremely low for one of the leading solar companies. Recently, the shares have received multiple buy ratings, including one from Kaufman Bros. which has a $24 price target for these shares. Shares of LDK are not far off from hitting a new 52 week high, and I believe the breakout over $15 per share to new highs is only a matter of time. Book value is listed at $7.80 per share.
Trina Solar, Ltd. (TSL) has pulled back to about $29. Trina is based in China and manufactures solar products. Just weeks ago, the company reported blowout fourth quarter earnings of $1.87 per share which beat analyst estimates of about $1.09. Despite this, the shares dropped since reporting earnings and very positive guidance for 2011. The 50 day moving average is $27.58 and the 200 day moving average is $25.25. TSL is estimated to earn over $4 per share in 2011. This puts the PE ratio at about 6. Multiple analysts have price targets of about $40 per share for TSL. Book value is listed at $16.73 per share.
JA Solar Company, Ltd. (JASO) has pulled back sharply, to about $7.09. JA Solar is based in China and manufactures solar products. These shares have fallen, from a 52 week high of $10.24. The 50 day moving average is $7.21 and the 200 day moving average is $7.10, so these shares are trading near support levels. JASO has earnings estimates of about $1.40 per share for 2011. This puts the PE ratio at about 5. Book value is listed at $6.22 per share.
Jinkosolar Holding Co., Ltd. (JKS) shares are trading around $26. Jinkosolar is based in China and manufactures solar products. These shares have fallen from a 52 week high of $41.75. The 50 day moving average is $27. JKS recently reported earnings of $2.36 per share for the fourth quarter, which also blew away the estimates. JKS has earnings estimates of about $5.42 per share for 2011. This puts the PE ratio at about 5. The shares have received multiple buy ratings with price targets of about $40 for these shares. Book value is listed at $17.05 per share.
Yingli Green Energy Holding Co., Ltd. (YGE) shares are trading around $12. Yingli is based in China and manufactures solar products. These shares have a 52 week high of $14.29. The 50 day moving average is $11.87 and the 200 day moving average is $11.43 so the shares are trading close to support levels. Estimates for YGE are about $1.61 per share in 2011. This puts the PE ratio at about 7 which is higher than the other Chinese names above but still a huge discount to the stock market average. Book value is listed at $8.17 per share.
China Dangdang (DANG) shares are trading around $21. Dang Dang is based in China and is often likened to be the Amazon.com (AMZN) of China. These shares have fallen from a 52 week high of $36.40. The 50 day moving average is $25.25. Dang recently reported earnings of 2 cents per share for the fourth quarter. Dang has earnings estimates of about 9 cents per share for 2011 and 21 cents for 2012. This puts the PE ratio at sky high levels but in time, growing profits could make the PE ratio more reasonable.
Perfect World Co., Ltd. (PWRD) has pulled back to $21. PWRD is one of the leading online gaming companies in China. These shares have fallen from a 52 week high of $42.18. The 50 day moving average is $21.92 and the 200 day moving average is $24.47. PWRD earnings estimates are about $2.49 per share in 2011. This puts the PE ratio at about 8 which is low for one of the leading online gaming companies. The balance sheet is extremely strong with almost $5 per share in cash.
As time passes, I believe investors will give these Chinese stocks much higher valuations through PE multiple expansion. Just as Baidu saw its PE multiple soar past Google's, these Chinese companies might even receive higher valuations than their U.S. counterparts one day, due to their low cost competitive edge and the huge future growth in Asian economies.
The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I am long PWRD, JASO, LDK, DANG, JKS.