I have identified 5 Chinese ADRs that we think are set to rally in 2012. Below is the analysis on these 5 stocks. I suggest using this analysis as a starting point for your own research.
Suntech Power Holdings Co., Ltd (STP): The slowdown in solar demand has made the year 2011 a very tough one for the solar manufacturers. However, a company like Suntech Power, a China-based solar company, has an advantage over its global peers due to Chinese government support, which includes cheap debt financing and production subsidies. This allows Suntech Power to ride out the bad times by maintaining healthy operating margins of 6%. Other companies in the sector struggle, like Japan-based Sharp Corp (SHCAY.PK), which has operating margins of 2.44% and a red bottom line. In 2010, Suntech Power acquired Reitech, increasing its capacity significantly. Suntech Power also sells most of its products outside China. In 2010, it sold 94.7% of its products overseas mainly to the U.S., Canada, Europe, and Japan. After a large decline of approximately 70% in its stock price last year, Suntech Power trades at a price-to-book multiple of 0.24x. Even though larger companies in the sector like First Solar (FSLR) have also seen their stock prices fall, First Solar continues to trade at a higher book value multiple of 0.71.
VanceInfo Technologies (VIT): Vanceinfo Technologies is a Chinese software development company and a leading information technology solutions provider. The company provides R&D services along with enterprise solutions. Its recently announced results showed 26% revenue growth, and even after its price rallied, the company continues to trade at a forward price-to-earnings ratio of 9x. Unlike many technology stocks, the company also has a strong balance sheet with a current ratio of 5.4x and cash of over $140 million. Most companies in the sector trade at high forward price-to-earnings ratio multiples: Cognizant Technology (CTSH) trades at 18.6x, Infosys Ltd. (INFY) trades at 15.6x while Wipro (WIT) trades at 18.4x. Vanceinfo also has a good customer base including Tata Consultancy, HCL Technologies and Infosys. The company is also planning to open offices in Australia by the end of 2012. Vanceinfo has been acquiring small businesses to strengthen its services, including 100% equity interest in a subsidiary of LW International Holdings, which provides business process outsourcing (BPO) services and 100% equity interest in Bright Consulting, which specializes in providing Oracle (ORCL) consulting. In March 2011, Vanceinfo’s board also approved a shares repurchase program of up to $40 million out of which the company has repurchased shares worth $38m.
Xinyuan Real Estate (XIN): Xinyuan Real Estate is a relatively less volatile stock with a beta of 0.55. The real estate company shows a black bottom line with profit margins of 15%. Recently the company, which focuses more on Tier II and Tier III cities in China, announced its acquisition of land in Xuzhou for approximately US$37 million, with a total area of 45,000 square meters. It is located in the same area as the company’s first project and is expected to perform equally well with high expected return on investment. Xinyuan will develop high-rise residential apartments on the property. By the end of last year, the company had completed 21 projects with a total gross floor area of approximately 2,049,460 square meters. The company is currently trading at a forward price to earnings ratio of 1.27x. The company had revenue of more than $600 million in the last 12 months and has a comfortable cash balance of more than $430 million. The price-to-earnings ratio is much below competitors such as Gafisa (GFA), a Brazilian-based company, which is trading at 7.99x and Kaufman & Broad, a France-based property developing company, which trades at 7.4x. The company’s current ratio of over 2x, combined with the high cash balance, places it in an ideal position to take advantage of cheap property options.
LDK Solar Co. (LDK): One of the largest solar companies in China, LDK Solar’s stock price recently fell to a low of $2.70. The reason was the speculation that the company would be unable to meet its debt repayments, after the withdrawal of subsidies in European markets. However, with the support of the Chinese government, LDK Solar has managed to restructure its short-term debt to long-term debt. With the revenue growth of 40% in the past 12 months, and deriving one-third of its revenue from the Chinese markets, LDK Solar is poised to benefit from the solar growth expected in China. There is also a potential for a 50% production subsidy, which will further benefit larger players like LDK Solar. Most importantly, LDK Solar is a cost efficient producer with operating margins of 14% compared with similar sized companies like MEMC Electronic Materials (WFR) and Yingli Green Energy (YGE), which have margins of 2.6% and 12.6% respectively. The company is also looking to expand into new regions like India, Australia and Middle East. The company is currently trading cheap with a trailing price-to-earnings ratio of 6.9x and trades at a 50% discount to its book value.
Gushan Environmental Energy (GU): Gushan Environmental Energy mainly produces biodiesel from various feed stocks including vegetable oil and animal fat. Since biodiesel products are further used to make chemical products, an uptrend in industrial manufacturing will directly benefit Gushan. With the pickup in the economy, the food sector also picks up, which is another major buyer of Gushan’s fuels. Even though the company is currently showing a loss, the past year’s drop in prices combined with the expected future growth makes it an attractive buy at current price levels. For the past four quarters, the company has been reporting increasing revenue; in the last quarter alone revenue was up 45% quarter-on-quarter. The stock is trading at an attractive price-to-book multiple of 0.15x. Like the other competitors in the industry, Gushan is expected to become profitable and perform at par. Companies like CNOOC Limited (CEO), PetroChina (PTR) and China Petroleum & Chemical Corp (SNP) all have gross margins above 20%, which bodes well for Gushan once economic activity picks up. In comparison with hot, but speculative plays like RenRen (RENN), Gushan is likely a more grounded bet.