Goldman Sachs: China Stocks May Go Crazy in Second Half 2011

The chairman of Goldman Sachs Asset Management, Jim O'Neill, just came out with some very encouraging words for a big rally in China-based stocks and a general global stock market rally in the second half of 2011. These remarks were made during an interview on Bloomberg TV in Hong Kong, which you can read here.

ONeill said the Chinese stock market could "go crazy" in the next few months and spark a global stock market rally. The article goes on to say: "His positive comments on the outlook for China came as two people with knowledge of the matter said Goldman Sachs plans to set up a yuan-denominated private equity fund in the nation. Chief Executive Officer Lloyd C. Blankfein attended a ceremony for Goldman Sachs in Beijing yesterday, the people said, declining to be identified before an announcement."

Those statements and actions by Goldman Sachs would seem to imply that Goldman sees a major opportunity in China based equities right now. The opportunities for growth in China are huge and after a tough couple of years for both Chinese and global stock markets. There is strong reason to believe that the long term fundamentals from China will again get traction from investors around the world. The population in China is so much larger and growing so much faster than the U.S., you can see a chart of the population growth here.

Unfortunately, the mindset of many American investors is too U.S.-centric and there is a belief that China based stocks will always have a lower PE ratio and valuation compared to their U.S. counterparts. However, it seems likely that one day, more high quality, well managed China-based companies such as Baidu (BIDU) will emerge with much higher valuations. With that in mind, here are a number of industry leading China-based stocks that appear very undervalued and offer great growth potential for many years, based on China's roughly 1.33 billion citizens. The stocks below are well positioned to benefit from China's leading position in green energy, the growth of Internet usage and telecommunications. The solar stocks offer great value now after a sector correction. In particular, LDK Solar (LDK) has a catalyst to surge higher now that fresh details are being released on its polysilicon spin-off which will have a $1 billion IPO shortly (see below for more details and links):

E-Commerce China Dangdang (DANG) shares are trading around $21. Dangdang 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 $21.85. 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. As the population grows in China along with discretionary income, Dangdang should benefit.

Perfect World Co., Ltd. (PWRD) is trading at $24.05. 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 $23.87 and the 200 day moving average is $24.72. 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. This is one of the cheapest Internet stocks in China.

LDK Solar (LDK) has pulled back to about $9.60. Not too long ago, LDK traded around $15. The relative strength index is about 32, so these shares are oversold and due for a rebound. These shares have fallen recently with the market and concerns about solar subsidies in Italy. The 50 day moving average is $11.32 and the 200 day moving average is $10.77. 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 3.5 which is extremely low for one of the leading low cost solar companies. China is already a leader in clean energy and it recently announced goals to further expand its dominance in this industry. You can read about their plans to double solar power goals by 2015 here. LDK has been rumored to be a takeover target multiple times in the past with a likely buyer being rumored to be Siemens (SI). You can see more on this rumor which was most recently in February here. With Total (TOT) of France recently agreeing to buy Sunpower (SPWRA) for $23.25 per share (which was a 46% premium to the stock price), it shows there is major interest in this sector and more deals are likely. It also shows the market is currently undervaluing solar stocks in general. Read about the Sunpower takeover which was announced a couple weeks ago here. Plus, LDK may spinoff the poly division in a Hong Kong IPO later this year which is likely to unlock hidden value in these shares. Of particular note is this just released Asian IPO Watch which reveals a $1 billion IPO for LDK's polysilicon and confirms Deutsche as the lead underwriter, see that report just released here.

Trina Solar, Ltd. (TSL) has pulled back to about $25.35. The 50 day moving average is $27.53 and the 200 day moving average is $26.37. 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. See more on TSL's last earnings report here. Trina is very well managed and a leader in the solar sector.

Jinkosolar Holding Co., Ltd. (JKS) has pulled back to about $27.61. The relative strength index is about 49. These shares have fallen from a 52 week high of $41.75. The 50 day moving average is $26.10. JKS recently reported earnings of $2.36 per share for the fourth quarter, which also blew away 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. Jinkosolar recently announced a share buyback for $30 million which you can read more about here.

Yingli Green Energy Holding Co., Ltd. (YGE) closed at $10.66 recently. The relative strength index is about 36. These shares have a 52 week high of $14.29. The 50 day moving average is $11.32 and the 200 day moving average is $11.19, 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 names above but still a huge discount to the stock market average. Yingli will benefit from China's growth and goals for increased solar power.

Giant Interactive (GA) is trading at $9.01. Giant Interactive is one of the leading online gaming companies in China. These shares have a 52 week trading range of $6.03 and $9.45. The 50 day moving average is $8.02 and the 200 day moving average is $7. GA earnings estimates are about 61 cents per share in 2011 and 69 cents for 2012. This puts the PE ratio at about 12 which is low for one of the leading online gaming companies. The balance sheet is extremely strong with about $4.29 per share in cash. Like PWRD, just about everything, from the low PE ratio, extremely strong balance sheet, and the future growth potential from the large population in China.

China Mobile Ltd. (CHL) is trading at $45.22. CHL is based in China, and provides telecommunications services. These shares have a 52 week range of $44.62 and $54.70, so these shares are trading fairly close to the 52 week lows. The 50 day moving average is $46.45, and the 200 day moving average is $49.50. CHL pays a dividend of $1.64 per share which is equivalent to a 3.6% yield.

Earnings estimates for CHL are around $4 per share in 2011. The book value is stated to be $22.08.

The data is sourced from Yahoo Finance and Stockcharts.com. 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. This information is solely educational in nature and not intended to serve as the basis for any investment decision.

Disclosure: I am long LDK.

Additional disclosure: I have shorted puts on DANG, LDK, PWRD, and JKS.