Josh Stern

11 Reasons Why It's Time to Invest in China and 5 Ways to Play It

I agree with the thesis of the article and I've acted on it (my positions are in different stocks than the ones mentioned). However, my experience suggests that the greatest risk to investing in at least the smaller Chinese companies that one is attracted to because of their very low valuations is that the mgmt. and BOD (often controlled by the same principals) believe they are growth companies and will typically attempt to pursue overall growth rather than Ben Graham type shareholder value. In fairness, they are often just doing what they claimed they would do in their original IPO prospectus, but shareholders are inevitably disappointed when companies with trailing P/E under 4 and a lot of cash choose to use the cash to acquire another company with trailing P/E of 10 or worse, invest the cash in a new facility costing 20-50% of their then current market cap.

An Unexpected Bright Spot for TV Advertisers in China

XFML is a stock that fits squarely into the category of advertising in China. The company is not very shareholder friendly however and has fallen from over $10 to under 50 cents today. It will probably bounce at that price, but isn't a long term buy until mgmt. focuses on growing shareholder value as the measure of performance instead of focusing only on growing revenue.

Why I'm Worried About China

In earnings reported over the last two months, results from domestic focused Chinese companies are holding up a lot better than the overall market while the stocks are doing a lot worse than the overall market - a good percentage are posting huge year on year gains while the stocks are down 50-90% and trading at outrageouly low valuation levels relative to trailing earnings/sales/cash flow/liquid assets. At the same time, many domestic facing Chinese companies reported blowout earnings, though many also cautioned about a sudden demand drop in October that clouded near term forecasts. From everything I've read, the lack of bank lines of credit for importers continues to be a huge problem for international trade and hurts Chinese exporters and manufacturers. At the same time, this factor is presumably temporary and causes indices like the Baltic Dry to severely underestimate even current low cyclical end demand for dry bulk shipping.

Taking all of the above together, I see the category of being a domestic facing Chinese company as currently a big investment plus when looked at purely from a macro POV. Bears counter that they think fraud is much more widespread. I don't see fraud as being plausibly common enough to come anywhere close to making up the huge discount in valuations these companies are getting now. I'd suggest instead that they deserve some discount because the immature investment culture tends to result in mgmt. that sees investors as more of a source of potential/past funding and less like actual owners of the company. As a result, I don't see valuations getting to par until dividend paying, share buybacks, and corporate buyouts become much more common than they are at present. But valuations are so compressed that Chinese companies still represent excellent opportunity for investors with longer time horizons.

Comparing Valuations in China and the U.S.

I use screens as an initial method to find companies with little or no doubt, lots of cash, and trading at multiples of 1x-4x cashflow and 0-1.5x revenue. A very large portion of the companies fitting the description these days are microcap China based ADRs. It's very common over the last month for these companies that are already down 50-90% to report strong earnings and a decent outlook and then turn around and go down some more the next day. The "reason" for that? It's a bear market...almost by definition everyone is skeptical of everything they can imagine to be skeptical about, and then some. And the investors who are not inclined to be so skeptical are out of cash or facing redemptions. Baskets of these stocks will be outstanding long term investments, but the timing of how long that will take is anyone's guess at this point.

Why Every Investor Needs To Have a China Investment Strategy

We all know that when an entire index drops by more than 20%, there are often a lot of small fry that get anonymously crushed. Not surprisingly then, there are a whole bunch of Chinese micro-cap ADRs with low to zero debt and trailing or forward PEs (among those with analyst coverage) in the 3X-8X range. For example:

CAGC CHCG CNOA CPHI CYXI FUQI GFRE LTUS QXM SORL SUTR XIN XING

In the case of these companies, the question of when China will slow and by how much is somewhat moot since they are already selling at distressed prices.