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<< Return to Part I

In a world of low GDP growth, investors have an appetite for investing in economies where economic growth is hovering around the pre-crisis levels. What can be better than investing in Chinese stocks as the Chinese economy is expected to grow by 8-9%. The Chinese mobile phone sector is booming as China recently became the largest smartphone market by volume in the world. Here is my analysis of the next 5 China-based stocks to consider for in 2012:

E-House Holdings Limited (EJ) provides real estate agency and consulting services to its Chinese customers. Earlier this year, the executive chairman purchased $10 million worth of E-House’s American depository shares because he believed that they were undervalued. At the end of October, the company submitted a proposal to acquire all outstanding shares of China Real Estate Information Corporation (CRIC). This move would help bolster their market position with offline agency services and new consulting techniques. E-House is planning on becoming the largest shareholder of Century 21 China Real Estate (CTC). Although this move would adversely affect the company’s earnings in the short run due to China Real Estate’s losses, the executive chairman believes that the company is likely to recover next year, becoming an attractive investment opportunity.

CBRE Group Inc. (CBG) and Jones Lang Lasalle Inc. (JLL) are its biggest competitors. E-House had the largest gross margin of 65% as compared to CBRE’s 42%, while the industry average was 58%. Despite a lower operating margin, the company had the highest price to sales ratio of 0.87x compared to its peers. Shares of E-House are currently trading around $4 and it is expected to reach the analyst average price target of $8. Currently, there is a great opportunity to buy the shares as it is trading near its 52-week lows. In addition to the expected capital gains, the company has a very attractive dividend yield of 5.3%.

China Mobile Limited (CHL) is the provider of mobile telecommunications and related services in China. It is also the world’s largest phone company by subscribers, amounting to more than 960 million customers. China Mobile is looking for future investments of CNY10 billion in the wireless data businesses and other machine-to-machine communications to expand its wireless business. This strategy is part of a Wireless City project that currently has 150 million registered users and is a potential source of significant future revenue for the company. As these projects get completed, the stock price of China Mobile will rise too.

Peers of China Mobile include China Telecom Corporation Ltd (CHA) and China Unicom Ltd (CHU). China Mobile posted the highest gross margin at 84% which was almost double the industry average of 42%. Its operating margin of 31% was higher than China Telecom’s operating margin of 10.5%, whereas the industry average is trailing at a mere 9%. Currently, shares of China Mobile are trading near its yearly high at $47 per share and are expected to reach an average of analysts’ price target of $53. The company had a dividend yield of 3.8%.

China Telecom Corporation (CHA) provides wire-line and mobile telecommunication services for China. In this article, a Chinese expert explains that with the upcoming changes in leadership and policies, more money may be pumped into state-owned enterprises such as China Telecom. This may be responsible for an erosion of profits in the short run but with its strong business model, the company is not likely to see any adverse effects in the upcoming years. It is planning on expanding into an emerging Ethernet-based market, whose effects will likely be seen after a couple of years. China Telecom also recently won a number of awards pertaining to finance disclosure, an outstanding annual report, and its investor relations website. It also won the “Asia’s Best Companies in Corporate Governanceaward, which highlights the transparency of China Telecom’s business. This transparency will help in outperforming its competitors. Pacific Crest Securities expects the company to “outperform” because of its competitive industry positioning. China Telecom reported a higher operating margin of 10.5% against China Unicom’s (CHU) operating margin of 2%. The company also reported a gross margin of 62.4% which was higher than the industry average of 57%. Shares of the company are being traded near its yearly 52 week lows at roughly $53 per share, indicating that the stock has future potential. The average analyst target price for the shares is $70.60.

Simcere Pharmaceutical Group (SCR) manufactures and supplies branded generic pharmaceuticals in China. Oppenheimer & Co. has released a report which gives Simcere a “perform” rating. They believe that a long-term volume growth is possible for the company. Iremod is a recently approved global drug made by Simcere that treats patients with rheumatoid arthritis. The drug is the first of its kind on the international market and is likely to bring in significant revenue. Simcere partnered up with Bristol-Myers Squibb Company (BMY), aiming to build sustainable development of new products which will increase market penetration, as new drugs are tested and introduced. The company’s biggest competitors are Novartis AG (NVS) and Jiangsu Guotai International Group Guomao Company (002091.SZ). Simcere’s gross margin of 84% are larger than Novartis’ gross margin of 70%. Its operating margin of 8% was significantly higher than the industry average of negative 56%. Shares of the company last traded near 52-week lows at $7.9 per share, indicating a good time to buy this stock. The shares are expected to go north of $9, according to the analyst average price target.

Acorn International (ATV) is a media and branding company based in China. It is the 8th best-performing Chinese-based stock in the U.S., according to China Analyst. With management changes made last year, the company is finally seeing top-line growth and improved gross margins of 40%, which are higher than the industry average of 36%. Earlier this year, Acorn started a new warehouse management system, boosting its delivery capacity and efficiency. Its mobile handsets contributed the most to the sales growth.

A few of the company’s peers include Alibab.com Limited (OTC:ALBCF), eBay Inc. (EBAY), and Avon Products (AVP). Acorn reported a quarterly revenue growth of 18%, which was higher than the industry average of 10%. Acorn has one of the lowest price-to-book ratios of 0.67 in the Catalog Retail Industry, indicating great value to investors. Acorn’s shares are being traded at around $4.6 per share.

Source: 10 Chinese Stocks For Profits In 2012, Part II