The Chinese economy is expected to be the fastest growing major economy in the world. China has begun to dominate various industries around the world. Over the last five years, Chinese companies have bought nearly $30 billion worth of assets from Canada in order to meet their demands for energy. As the global economy moves towards a recovery many Chinese stocks are set to outperform their competitors in U.S. These stocks are seeing a rise in valuation. The solar sector in China, for example, has greatly overtaken that of its U.S.-based counterparts as the gap in the production capacity widens.
Here is part one of my two-part analysis of ten China-based stocks to consider for 2012:
Agria Corporation (GRO) is an agriculture company based in China and is engaged in research and development, production and sales of various seed products. Most recently, the company received a grant which will be used to fund a joint research in application of seed variety in China. This is a positive signal to attain a long term competitive advantage. The company has also appointed an independent director, who has extensive information in his field, and will play a key role in future expansion projects.
Direct competitors of the company include Monsanto Company (MON), Origin Agritech Limited (SEED), and Shandong Zhouyuan (SZSN.PK). Right now, Agria has a gross margin of 40%, well above the industry’s average of 23%. Though the valuation is on the expensive side but better-than-industry growth prospects offset this.
Shares of the company are currently being traded at around $1 per share. The average analyst target price for the shares of the company is $2. Over the last 52-weeks, its shares have traded between $0.63 and $2.12. The company has a small market capitalization of $60.94 million.
Trina Solar Limited (TSL) is a Chinese manufacturer of solar-power products. The recent bankruptcy of three U.S. solar power companies has been quite beneficial for Trina Solar, helping the company gain a dominant market position. Trina Solar is expecting to cut costs as land is subsidized by local governments, while tax breaks are also being offered to the industry. Outsourcing of its wafer technology helps it maintaining cost leadership. Analysts believe that low cost structure will help it survive any slow-down in the solar industry. The recent fall in poly prices will help the stock trade higher, as the margins will expand. It was also the sixth-best U.S. listed Chinese stock on December 22, 2011.
Peers of Trina Solar include LDK Solar Company (LDK), Suntech Power Holdings (STP), and Yingli Green Energy Holding (YGE). It has the highest revenue generating ability in the industry and its earnings per share of $2 are highest amongst its competitors. Trina Solar’s operating margin of 10.6% is higher than the industry average of near zero operating margins.
Currently, its shares are being traded around $7.4 and are expected to go north of $9 by the end of 2012, according to an average of the target prices of analysts. Its shares have traded within a range of $5.28 and $31.08 over the last 52-weeks and market capitalization for the company stands at $522.67 million. A price to equity ratio of 3x is below historical average.
WuXi PharmaTech Inc. (WX) is a leading pharmaceutical, biotechnology, and medical-device research and development outsourcing company. It was listed in the ‘Top Ten Chinese Outsourcing Enterprises’ earlier this year. The company acquired Abgent, expanding and strengthening its successful business model. The facilities and research of its new acquisition allows WX to not only produce products at reduced costs but also to expand its customer base. The company has also opened a new testing facility, helping it test and approve more products, thus serving as a potential revenue source.
Other companies in the same industry include Charles River Laboratories (CRL), Covance Inc. (CVD), and ICON plc (ICLR). WuXi has had the highest quarterly revenue growth of 24% against its competitors, with Covance as the second highest company at 12.8%. WuXi’s margins are significantly higher than that of its peers.
The shares of the company are currently trading at around $11 and are expected to go north of $18, according to the average of target prices given by the analysts. Within the last 52-week period, its shares have fluctuated between $10.74 and $19.10. Market capitalization stands at $801.32 million and the company reported earnings per share of $1.04. It has a price to sales ratio of around 2 times which is greater than that of its competitors.
China Southern Airlines Limited (ZNH) is a state-owned Chinese air transport group. It deals with the provision of passenger, air cargo, and mail airline services. Earlier this year, the company was given a Four-Star rating by SKYTRAX based on service quality and front-line products. Also, the company was given an award for winning the ‘Green 2011 Top 10 Leading Enterprises of China’s Economy’, emphasizing the company’s commitment to social responsibility.
Cathay Pacific Airways (CPCAY.PK) and China Eastern Airlines Corporation (CEA) are the major competitors for the company. China Southern Airlines has a greater gross margin of 25.81% against Cathay Pacific’s 22.24%. A quarterly revenue growth of 18% is the highest in the industry. Both the price to sales ratio and the price to earnings ratio of the company are considerably higher than the industry average and that of the nearest competitor. However, better growth rates and higher margins than the industry makes this a buy.
The company’s shares are currently trading around $25.50. The average analyst target price for the company is $42. Its shares have traded within a range of $19.80 and $35.45 over the last 52-weeks.
CNOOC Limited (CEO) is a producer of offshore crude oil and natural gas. The company also engages in exploration and development of its oil, gas, and petroleum products. CNOOC recently acquired Canadian-based OPTI which will result in the redemption of $825 million worth of debt securities. The current global environment of higher oil prices is likely to benefit the company. The ADR (American depository receipt) is trading at a premium to its shares listed in Hong Kong. Many analysts have given the company a buy-rating.
Peers of the company include China Petroleum & Chemical Corporation (SNP), Exxon Mobil Corporation (XOM), and Petro China Company (PTR). The company’s gross margins of 72.83% are significantly greater than that of Petro China’s 41% and the industry. Its operating margin is also significantly higher than the industry average. It enjoyed a quarterly revenue growth of 51.20%, against the industry average of 15.50%. The company is better positioned in the industry and the stock will trade higher on the above average growth rates and the margins.
Currently, its shares are being traded at around $175. The average analyst target price for the company by the end of 2012 is $230. Over the last 52-week period, its shares have traded between $141.27 and $271.94. The company has market capitalization of $78 billion and it reported earnings per share of $23.80.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.