I have identified 10 Chinese stocks that I think have the potential to outperform their peers in 2012. Here is the analysis on these first 5 names that sophisticated investors should use as a foundation for their additional research.
PetroChina Co. Limited (NYSE:PTR) is the listed arm of state-owned Chinese company China National Petroleum Corporation. PetroChina is China's biggest oil producer, and the first company to reach a trillion-dollar market capitalization. This company is engaged in four operating segments: Exploration and Production, Refining and Chemicals, Marketing, and Natural Gas and Pipeline. The company is expected to post healthy earnings going forward, given that its serving energy starved nation. The company’s aggressive investments in exploration and development activities will add to the bottom line, going forward.
The company has recently signed an agreement with the Zhejiang government on six petrochemical projects worth $22 billion, in conjunction with Sinopec. PTR has recently stepped into LNG market too. PetroChina started commercial operation of its first LNG terminal in November, 2011. On Dec 27, 2011 it also started operations at its liquefied natural gas terminal in Dalian, delivering gas at a daily rate of 6 million cubic meters. Valuations for the company are in line with its peer average. Stock is currently trading at trailing price to earnings ratio of 12.3x and with current Price/EBITDA of 5.4x. The Free cash flow and Dividend yield for the company stands at 1.7% and 4.0% respectively.
Qiao Xing Mobile Communication (NYSE:QXM) develops, manufactures, markets, and sells mobile handsets in China. The company offers its products under the CECT and VEVA brand names. The company continues to perform well in the fastest growing economy of the world. The company’s future prospects are evident from the fact that Qiao Xing Universal Resources Inc. (XING), the majority shareholder of Qiao Xing, has recently announced its proposal to acquire all of the outstanding ordinary shares of Qiao Xing. The last few quarters' performance has not been up to expectations owing to industry pressures. However, stock appears very cheap on price to book value. It’s currently trading at a price to book of 0.4x, a significant discount compared to its peers.
Semiconductor Manufacturing International Corp. (NYSE:SMI), a semiconductor foundry and an investment holding company, is engaged in the computer-aided design, manufacture, packaging, testing, and trade of integrated circuits. The company‘s clients include integrated device manufacturers, fables semiconductor companies, and system companies based in the United States, Europe, and the Asia Pacific regions. China's largest and most advanced semiconductor foundry – SMI recently received 1 billion unit product milestone award from its customer - Qualcomm Incorporated (NASDAQ:QCOM). Qualcomm, the world leader in 3G and next-generation mobile technologies appreciated SMIC for its excellent track record of supplying quality power management processors.
The company has been very aggressive in forging partnerships and making investments in chip manufacturing industry. In May 2011, the company announced that it proposes to enter into the Joint Venture Agreement with Hubei Science & Technology to invest as operating partner in Wuhan Xinxin’s 12-inch wafer production line. Another partnership is being made with Crocus Technology, in order to develop high-temperature Magnetic Logic Unit technology for automotive applications. China Investment Corporation, in the early part of the year, also announced a definitive investment into SMIC of worth $250 million. The company also plans to invest $6.7 billion in an integrated circuit plant in Beijing. Stock trades cheap on absolute valuations but in-line with industry average. On the basis of trailing 12M, current year estimated and forward EV/EBITDA, the stock trades at 3.3x, 6.0x and 5.7x respectively. At the same time company appears very cheap on Price/Free cash flow basis, which currently stands at 5.6x.
China Petroleum & Chemical Corp. (NYSE:SNP) is an energy and chemical company which is engaged in Exploration & Production, Refining and Marketing & Distribution of oil and natural gas in China. The company’s chemical operations include the manufacturing and marketing of a range of chemicals for industrial uses. The company operates 16 oil and gas production fields in China. It has estimated proven reserves of crude oil and natural gas of 3,963 million barrels-of-oil equivalent (boe). The company has recently signed an agreement with the Zhejiang government on six petrochemical projects worth $22 billion, where the company will work on LNG projects in Wenzhou and build a long-distance natural gas pipeline between Xinjiang and Zhejiang.
China Petroleum & Chemical appears cheap on absolute and relative valuations, especially when compared to its closest peer Petro China (PTR) and Cnooc Limited (NYSE:CEO). The stock is trading at 12M trailing and forward Price earnings ratio of 7.3x and 6.9x respectively. The Ocwe the last several years the company has been posting double digit growth in its revenues and earnings per share. 5 years CAGR for earnings is 24%. Last year, the company posted earnings per share and Revenue growth of 43% and 14% respectively. Company also appears cheap on the basis of Price/EBITDA, forward EV/EBITDA and free cash flow yield of 3.0x, 4.6x and 5.8% respectively.
ReneSola Ltd. (NYSE:SOL) is a manufacturer and seller of solar power wafers in China. The company also provides cell and module processing services. The company has an annual wafer manufacturing capacity of ~825MW. ReneSola’s clientele includes solar cell and module manufacturers based in China, Singapore, Taiwan, south Asia, Europe, and the United States. the company reported a very healthy free cash flow / share of ~$2.99 in its latest earnings. It recently announced the completion of 20MW solar plant in Qinghai, China. The company provided all the solar modules for first of its kind solar plant. The stock trades cheap on both absolute and relative basis. At current year estimated and forward EV/EBITDA of 3.9x and 6.8x stock trades at ~60% and ~25% discount compared to its peer average. However, company’s current year estimated price to earnings of 9.8x is in line with peer average of 9.5x.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.