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  • Chinese Companies Bubble but it won't bust. & 5 good industries to invest.  0 comments
    Jan 20, 2010 8:24 PM | about stocks: YUII, CISG, HMIN, FXI, CAGC, CAG
    There is two problems in China.
    Huge debt in Corporation. 
    High P/E

    Two big advantages in China.
    Low personal GDP means low labor cost for next ten years
    High Growth to offset High P/E

    Chinese companies borrow heavily to fund their expansion. A normal healthy company should use their new generated profit to reduce debt or fund expansion. However, in China, many of the companies reinvest the profit into stock market and real estate market to generate short term profit. 
    A higher stock market and real estate price pushed by the corporations and government makes people feel richer. Hence people will consume more. More consumption will bring more demand which will increase GDP. This cycle will continue until it reach the golden state model.  At this circumstance, Chinese companies can continue it growth model as long as the real estate and stock market did not fall. 

    However, how high the Chinese stocks can go? Chinese stocks has a average P/E of 50 or higher. A P/E of 50 means it takes 50 years for the owner of the company to get back their investment. Even discounted the growth rate of 20%, it still takes 23 years for investors to break even. A 5% T Bill can double your money in 20 years. Hence, there is a limit that the Chinese stocks can go up. 

    Even Chinese stocks are overvalued, if in the following years, the stock market grow less than 30% annually, the market should not have a big correction. Eventually real earning will catch up the crazy stock price. Therefore, buying companies with low PEG is the key to invest in China. 

    Any Chinese companies with small debt/asset ratio, good growth, and less than 1.5 PEG is worth to invest.

    5 industries to invest in China
    As the life standard increase in China. People will eat better, travel more, and buy more insurance. Consumer goods, Hotel, Airports, Insurance industry has high growth potential. Also technology services is big market in China because Chinese companies will continue to improve production efficiency. 

    (Yuii) Chicken producers. (Cisg) insurance broker. Hmin(hotel) are good. They all have stable cash flow and future growth potential. Hmin is little bit high on it P/E. 

    Disclosure: yuii,
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