Despite the weak economic conditions worldwide, there are many options which are expected to yield good returns in 2012. Here, I present analysis on the next five Chinese stocks expected to outperform for the year 2012. Sophisticated investors can use this analysis as a starting point in their research.
NetEase.com Inc (NTES): NetEase.com’s share price is up over 19% in the past year in a market which has shown a lot of volatility. Share performance has been driven by strong revenues after the launch of World of Warcraft II this year, high profit margins of 45% and a return of equity of 28%. In the last reported quarter alone, the company’s revenues and earnings both grew by approximately 40%. With very healthy cash flows, the company has ample cash on its balance sheet and has a current ratio of 6x.
NetEase.com is trading at a forward price to earnings ratio of only 10.5x. On December 1, the company’s board of directors agreed to a stock buyback program worth $50 million American Depository Shares within three months. NetEase.com is an internet technology company mainly involved in the development of applications and services. The stock trades at a price-earnings growth of 0.6x, compared to the industry average of 1.5x. Notable competitors like Sina Corporation (SINA), CGI Group (GIB) are trading at a higher price earnings to growth multiples of 2.2x and 1.7x. High internet users growth in China will benefit the company in the long term.
Perfect World Co. (PWRD): Perfect World is an online game developer. It is involved in development of massively multiplayer online role playing games (MMORPGs). It operates in 3D, 2.5D and 2D market, as well as real-time games. The company’s business model is “freemium” – where the company gives away the game for free and then charges customers for some higher-level utilities within the game. In its last reported quarter, the company showed revenue growth of 22% and a high profit margin of 29%. Its balance sheet is also healthy with cash per share of $6.9 and a current ratio comfortably over 1. Like NetEase.com (NTSE), it is trading at a low valuation with a forward price to earnings ratio of 0.57x. The stock price significantly fell in December. We expect the company to benefit from newer markets and users in the coming year.
Origin Agritech Limited (SEED): Origin Agritech’s last annual result showed a profit of $ 7.3 million. With revenues of over $80 million the company is much smaller than its competitors--Monsanto Company (MON) and Syngenta (SYT). However, both its competitors trade at high price to earnings multiple of 23x and 17x respectively. The price/sales ratio of Origin Agritech is just 1.3x. With the next year expected to bode well for the agriculture sector, we expected Origin Agritech to benefit. The company is involved in the research, development, production and sale of agricultural crops and seeds. After the recent debate over the usage of genetically modified seeds, the company is planning to focus more on the northeastern seed corn market. Origin also recently formed a joint venture with a local company for seed production and distribution.
Spreadtrum Communications (SPRD): Spreadtrum Communications is a fables semiconductor company developing solutions for the wireless technology. The company showed a net margin of 21.6% in the last reported quarter, while revenues grew an impressive 92% quarter-on-quarter. The stock price has increased 14% in the last year, and with a forward price to earnings ratio of just 7.5x, there is still potential in the stock going forward. The company has low leverage and equity is constantly being shored up by growing earnings – in the last quarter alone earnings are up over 100% over the previous quarter. The sector trades at a price to earnings ratio of 12.4x with companies like Texas Instrument (TXN) trading at 12.1x.
Fuwei Films (Holdings) Co., Ltd. (FFHL): With a 64% decline in stock price last year, Fuwei films is now priced at $1.23 and trades a trailing price to earnings ratio of only 2.1x. It is one of the cheapest stocks in the Commodity Chemicals sector where large companies like E. I. du Pont de Nemours and Company (DD) and Toray Industries (TRYIY.PK) are trading at 12x and 131x price to earnings ratio. The company’s revenue are down 10% quarter-on-quarter but maintains a healthy profit margin of 9%. Fuwei films is in the business of manufacturing and distributing plastic film known as biaxially oriented polyethylene terephthalate film. This is used for consumer products’ packaging, especially in the food, pharmaceutical, cosmetics and tobacco industries. The product demand is expected to pick up with the economic growth expected next year.