Opportunities In China Following Today's Selloff

As we have been highlighting in our meetings with clients since early January, we have been looking for a correction in the Chinese domestic market which would have a knock-on effect in other listed Chinese companies in HKG and the US. Developments overnight indicate that our prediction is coming true.

We believe that there are some good value names to buy, but would wait before buying. As outlined below we are most interested in companies with hard assets (RoadKing) and undervalued consumer plays (China Netcom, Beauty China and Shanda).

We have been highlighting concern about the rapid run up in the Chinese markets and the comments by government officials that this was a growing bubble that has to be managed. This appear to be exactly what happened.

While we believe it is too early to jump into this rout of the Chinese markets we believe that an opportunity will present itself in the coming days. At that time we would focus on the following four stocks:

RoadKing (RKG) - As outlined in our Feb 2nd note we believe this stock is worth $17 HK and at $12.5 was trading at P/Book of just 1.42x and P/E of just 9.5x. The recent acquisition of a major land bank in China will likely make earnings more choppy but the valuation is very compelling.

China Netcom (CN)- We have liked CN for a long time for its high-quality management, close connection to the government and low valuation. This northern China fixed line operator dominates the DSL connection business in its region and we believe is best positioned to benefit from the eventual roll-out of 3G wireless.

Beauty China - This Singapore-listed Chinese cosmetics company is cheap relative to its growth and peers. Trading at a P/E below 9x, this debt-free company has an ROE of 24% and provides good exposure to the Chinese consumer.

Shanda (SNDA) - Recent changes at the company have begun the proces of turn-around after 18 months of disappointing the market. This on-line gaming company trades at about half the valuation of better-known Netease and The Nine but with a strong pipeline of games we believe Shanda could be the dark horse of Chinese gaming stocks in 2007.

Comments

[Ray Lopez:]

Congradulations on calling the China stockmarket downturn! Perhaps the China market will resemble Saudi Arabia in 2006? (from 8k to 3k in their index). Time will tell...

2007 Feb 27 04:45 PM