Despite Pullback, Chinese Market Should Gain

Apparently, in 2008 not even the Chinese stock market is immune to significant price depreciation. We asked Zacks senior Chinese market analyst Paul Cheung, CFA about this, as well as where he expects the market to go from here.

For awhile, it seemed as if the Chinese market was going to roar past the U.S., but since the beginning of the year this has not been the case. Why is that?

The Chinese market has declined by more than 20% since the beginning of the year mainly due to the following reasons:

Ping’an Insurance Group plans to raise more than $20 billion from the Chinese A share market, and other companies also plan to raise huge amount of money from that market. This indicates that the companies think the market is overpriced.

Also, the Chinese government will continue to tighten the monetary supply through increasing interest rates and reserve requirements for banks. The supply of stocks will increase significantly because a huge amount of restricted shares will become floating.

For those Chinese companies in your coverage, how do you expect them to perform overall?

Overall, I expect them to outperform the S&P500 because those companies operate in China, whose economy will still grow more than 9% in 2008. In addition, most Chinese companies will benefit from the appreciating Chinese currency.

Would you say Chinese stocks have both good growth and value at the present time?

I still would say Chinese stocks have both good growth and value at the present time because most of them are profitable and their PEG ratio is less than 1.

Which are your top two or three stock picks right now?

Ctrip.com (CTRP) is the leading online travel company in China, with a market share of around 50%. As more and more Chinese go out for traveling, Ctrip is expected to grow its earnings at an annual rate of 35% in the next five years.

Sohu.com (SOHU): an Internet portal in China and the official content sponsor of the Beijing 2008 Olympics. Sohu’s online advertising business will record significant growth in 2008. Moreover, the online game business will contribute a lot of revenue in 2008 due to the popularity of its in-house developed online game.

In what ways would you advise investors – especially in the U.S. – to consider Chinese stocks throughout 2008?

Investors in the U.S. can invest in Chinese companies listed on the U.S. market because the peers of those companies listed on China’s market have much higher valuations.

Paul Cheung, CFA is a senior analyst covering the Chinese market for Zacks Equity Research.

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