Since my last analysis of the China opportunity last December, FXI is up 20% in 6 months - a stellar performance. But investors that are finally opening up to China or those that have taken profits along the way might wonder which companies to invest in. After all, it seems like there are new China stocks and ADR's sprouting up every time you look. Here are some stocks that I believe are sound Chinese investments that I believe will outperform the overall market over the next 12 months.
Mindray Medical (MR) - Mindray Medical is a chinese medical device maker, that primarily manufactures patient monitoring and imaging systems. Earnings growth in the most recent quarter was 40%, while revenues grew by 30%. More importantly, the company guided higher on both annual revenues and earnings. MR has almost no debt, and trades at a reasonable 30 times earnings. For the last 6 months, MR has been forming a base. I like the stock at these levels, considering that earnings are projected to grow 30% annually for the next few years.
China Life Insurance (LFC) - China Life Insurance is the largest insurance provider in China, a country where insurance coverage among the citizens of China is relatively new. Indeed the concept of having life and health insurance is not as mainstream in China as in the US. And with the largest population in the world, China is a great growth market for insurance. LFC has over $11 billion in cash and has diversified their investments across other industries including construction, banking and power generation. I like this stock here despite high valuations.
China Mobile (CHL) - China Mobile is the world's largest mobile-phone company by users. In April, the company added a 5.28 million users, a record number of subscribers for a ninth consecutive month. This on the tails of a record March, when they added 5.12 million users. For the fourth quarter ending March, they added over 14 million subscribers and April's number puts them at a total subscriber base of 321.4 million, more than the entire US population. With 70% market share, CHL continues to take market share from land line providers. Even with their recent aggressive push to gain market share by adding new features and low costs to their customers, CHL has margins of over 50%. I want to mention here that average monthly revenue per subscriber did fall about 13% in the most recent quarter, even as earnings grw 22% and revenues increased 19%. The drop in average revenue per customer is directly tied to the addition of low end users to China Mobile's portfolio. The one challenge that the company faces is the probably expansion of China's land line network (sponsored by the Chinese government) and the issuance of 3G licenses to land line competitors like China Telecom (CHA) and China Netcom (CN). However, this will probably not happen until sometime in 2008. I believe CHL is a strong company in a growing market.
LJ International (JADE) - JADE designs and sells fine jewelry to top retailers like Helzberg, Zales, Kay, Macy's and even Walmart. The company operates out of Hong Kong with China as its fastest growing market. Over the last 6 months, the stock is up over 250%, so a pull back is on the cards. However, it might be brief if that, considering that the company plans to open 100 stores before the 2008 Olympics. With earnings growing at about 50%, the stock is cheap at 15 times earnings even after the run up.
Ctrip.com (CTRP) - In the most recent quarter ending March 31st, the company's net sales increased by 54.5% to $30.1 million, which included a 40% increase from hotel reservations and a 64% increase in airline ticket sales. Additionally, the company is projecting revenue growth north of 30% going forward, and has recently entered a limo business in the major cities in China. Ctrip.com also does not have any debt and with travel to China on the rise, and most of the travel business still taking place offline, CTRP has plenty of room to grow.
51jobs Inc (JOBS) - I believe this is the most speculative stock of this bunch. In fact, I would not be surprised if someone like a Baidu (BIDU) or a Netease (NTES) or Sina.com (SINA) might buy these guys out (similar to how Yahoo bought Hotjobs.com). I do recommend that risk averse investors stay away from this stock simply in lieu of the volatility it presents. To give you an idea, from Oct 2004 to December 2004, the stock went from $21 to $55 before falling back to $21 by the third week of January 2005. The rest of 2005 saw this stock trade as low as under $10, only to bounce back shortly a year ago to $31. The stock currently trades at around $18. Earnings and revenue growth has been steady at between 15-20%, and the stock trades at 25 times forward earnings. While not a bargain, this is the main source of job listings online and through print in China. And with non-farm related jobs increasing in the populous country, the stock should enjoy a booming market.
Baidu.com (BIDU) - There is not much more to say about Bidu.com (BIDU), except that this is the Google of China, and has been really giving it to Google in China, accounting for over 50% of online searches in China. With only 10% of the Chinese market online, the company has amazed investors by churning out triple digit earnings and revenue growth.
The9 Limited (NCTY) - The9 Limited is a Shanghai based online games provider that focuses on multi-player online role playing games for Chinese online gamers. The company has licenses for popular titles like World of Warcraft and Guild Wars. As mentioned earlier, only 10% of China is online, so these guys have the opportunity for tremendous growth. If you take out the $5 per share that they have on their books, the stock trades at a paltry 13 times forward earnings. These are extremely low valuations considering that the company is growing earnings at over 50% and the PEG ratio sits at under 0.80. While the company is set to report earnings on Monday, the quarter that ended in December of 2006 saw them beat analyst EPS expectations by over 45%. In fact, for at least the last 4 quarters, they have beaten analyst estimates. As an added incentive the stock has retreated 10% off its recent highs and with new popular titles currently under development, I recommend buying this stock at these levels.
Yanzhou Coal Mining (YZC) - There is a turn around happening in the coal sector, but Yanzhou never needed one to begin with. While the last year has seen its American counterparts like Peabody (BTU) and Arch Coal (ACI) flat to down, YZC stock has soared 66%. Demand for coal has never been greater despite the fervor with which global warming is being discussed. China itself depends on coal for two-thirds of its energy needs. With all the solar, nuclear and wind energy alternatives still expensive and under-developed, coal remains one of the cheapest and most efficient ways to produce energy. That being said, YZC is a winner with its 2.3% dividend yield, its cheap. Revenue growth is projected at about 15% and the company has over $8 in cash. The stock is due for a pull back, but I believe its time to open an initial position in the stock at around $60.
Focus Media Holding (FMCN) - This is a media and advertising company that owns giant outdoor LED displays, poster frames in elevators and a network of tens of thousands of television monitors in traffic areas. More importantly, the company is in a business that is about to explode with the influx of olympics enthusiasts next year. In deed, one can only imagine how well this company is positioned to take advantage of selling messages via big screen installments at stadiums, theatres, airports, buses and even hotels. In the first quarter ending March 2007, the company reported a 70% increase in revenues, beating EPS estimated by 2 cents. With the earnings release, the stock looks to be breaking out of a double bottom. And at a PEG ratio of 0.7, the stock is extremely cheap.
I am also listing an 11th stock - lets call it a wild card. You'll see why I call it that.
Guangshen Rail (GSH) - In a five-year plan ending in 2010 the Chinese government is shelling out $161 billion (1.25 trillion yuan) to lay new tracks and acquire equipment to expand the rail system. It is spending an additional $32 billion on rolling stock and locomotives. It may come as a surprise to investors, but China's railays are among the world's busiest. In fact, according to Deutsche Bank, they move 24% of global rail traffic with just 6% of the world's tracks. The supply-demand dichotomy is so great that on average, only one-third of shipment demand is met. According to Forbes, by 2010 the Ministry of Railways aims to have added 10,500 miles (17,000 kilometers) of new track, bringing the country's total to 56,000 miles. The opportunity that comes with such outlays is huge. One problem though - the Chinese government is expected to give a lot of this business to foreign rail road companies in exchange for technology knowledge transfer. So far, GSH has not publicly been awarded a contract, but since it is the only rail road ADR, it is worth a look. The business case here is strong enough that even if GSH is not awarded any of the major development contracts, they will benefit from maintenance and repair contracts.
FXI 3-yr chart: