19 Chinese Stocks That Are Relatively Cheap

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Includes: ACH, BIDU, BNI, CEO, CHL, CTRP, CYB, EDU, FXI, FXP, GSH, GXC, HAO-OLD, HMIN, JST, LFC, MR, NTES, PGJ, PTR, PWRD, SINA, SNDA, SNP, SOHU, T, TAO, TSL, XOM, YZC
by: Hao Jin, CFA

China's rapid economic growth will be the global story of the foreseeable future. Like the Japanese in 1980s, the Chinese are shopping for Hummers, IBM PCs, natural resources and real estate.

In addition to growth, many investors look at emerging markets such as China as potential protection against a falling dollar. No one wants to lose money any more after the market crash of last year, but neither can anyone afford to miss out on potential huge growth ahead. Money is flying back to Chinese stocks, causing valuations to rise rapidly. Are there still windows of opportunity left?

I went though all Chinese stocks listed in U.S. stock exchanges with market cap greater than $1 billion. Below are 19 with positive P/Es (sorted by P/E):

Name
Symbol
P/E
Mkt cap
% Chg. From 52wk Low
Aluminum Co of China
(NYSE:ACH)
7.9
16.02B
410%
China Petroleum & Chemical Corp
(NYSE:SNP)
9.7
76.75B
191%
Yanzhou Coal Mining
(NYSE:YZC)
11.1
7.47B
376%
China Mobile Ltd
(NYSE:CHL)
12.2
199.92B
145%
PetroChina Co Ltd
(NYSE:PTR)
13.6
221.75B
215%
Sohucom Inc
(NASDAQ:SOHU)
14.6
2.47B
189%
CNOOC Limited
(NYSE:CEO)
15.3
65.35B
264%
Shanda Interactive
(NASDAQ:SNDA)
15.5
3.22B
243%
Guangshen Railway
(NYSE:GSH)
17.7
2.97B
161%
NetEasecom, Inc
(NASDAQ:NTES)
20.1
5.23B
270%
Perfect World Co, Ltd
(NASDAQ:PWRD)
20.7
2.15B
497%
Trina Solar Limited
(NYSE:TSL)
26.1
1.03B
618%
Mindray Medical Intl
(NYSE:MR)
29.0
3.24B
244%
SINA Corp(NYSE:USA)
(NASDAQ:SINA)
32.8
2.08B
216%
China Life Insurance
(NYSE:LFC)
40.6
129.73B
206%
New Oriental Edu
(NYSE:EDU)
52.0
3.14B
217%
Ctripcom Intl, Ltd
(NASDAQ:CTRP)
57.4
4.14B
377%
Baidu, Inc
(NASDAQ:BIDU)
83.4
14.61B
420%
Home Inns & Hotels
(NASDAQ:HMIN)
108.8
1.34B
483%

The top 9 stocks in the list have P/Es lower than 18. They seem to be still reasonable priced, even though some of them have bounced back more than 400% from their 52-week-lows. These 9 inexpensive stocks are in 3 sectors: commodity, technology and railroads.

Commodity

ACH, SNP, YZC, PTR and CEO are all commodity related. Although the worst is likely behind the commodity sector, weakness might persist as long as excess supply does.

A study published in Journal of Investing, Spring 2009 issue finds that adding a significant allocation to commodity substantially improves portfolio performance. The performance is more dramatic for indirect investment via the equities of companies than for direct investment in the commodities themselves. Gold consistently provides a greater benefit than either platinum or silver. The findings are consistent during much of the 34-year study period.

Below are comparisons between Chinese oil & gas stocks and Exxon Mobil Corp (NYSE:XOM). As you can see, Chinese oil giants don’t have a clear advantage over Exxon Mobil:

Metric
SNP
PTR
CEO
XOM
P/E
9.74
13.6
15.2
11.2
Operating Margin
5%
15%
40%
15%
Debt/Operating CF
3.1
1.0
0.3
0.2

Technology

China Mobile Ltd (CHL) is a Chinese mobile-phone providers that has a huge cash stockpile it can use to continue expand. Below are comparisons between CHL and AT&T (NYSE:T):

Metric
CHL
T
P/E
12.2
12.7
Operating Margin
33%
18%
Debt/Operating CF
0.1
2.1

With higher operating margin and much lower debt load, CHL is clearly in much better position. Also, it doesn’t have huge goodwill sitting in its balance sheet, like AT&T does. Those Goodwill results in AT&T’s negative Net Tangible Assets.

SOHU and SNDA both have much higher growth rate than CHL, though they also have higher short ratios.

Railroads

Below is a comparison between Guangshen Railway (GSH) and Burlington Northern Santa Fe Corp. (BNI). No wonder Warren Buffett prefers BNI.

Metric
GSH
BNI
P/E
17.6
14.0
Operating Margin
14%
24%
Debt/Operating CF
2.4
2.6

ETFs

The following are the main China related ETFs/ETNs, including short and currency:

Fund Name
Ticker
Net Assets
Portfolio P/E
iShares FTSE/Xinhua China 25 Index
11.30B
14.6
SPDR S&P China
455.46M
17.0
PowerShares Gldn Dragon
439.50M
16.1
UltraShort FTSE/Xinhua China25
269.93M
Claymore/AlphaShares China Small Cap
182.13M
15.4
WisdomTree Dreyfus Chinese Yuan
136.81M
Claymore China Real Estate
79.43M
16.0

The most populate one is FXI, which owns 25 mature, state-owned and too-big-to-fail Chinese companies listed in Hong Kong.

Small Cap

Super growth usually comes from small to mid cap. I lowered the criteria to include any profitable Chinese stocks with market cap greater than $100 million. Jinpan International Ltd. (NASDAQ:JST) engages in the design and manufacture of cast resin transformers for voltage distribution equipment in China. Its P/E is 9, PEG is 0.56, debt/operation cash flow is less than 1, and short ratio is very low. However, the market cap is only $250M.

Conclusion

Investors usually have short-term memories. We seem to be driven by most recent market rally, conveniently forgetting the lessons of last year. Hot markets eventually cool, and most investors don't catch on until it's too late.

Investors do have a habit of buying hot stocks. If a stock can be up 400% over the last 12 months, it could also be down 75% in the next 52 weeks. However, if you can tolerate this kind of risk, and have a very long invest horizon, you might want to consider these profitable and still relative inexpensive Chinese companies presented above.

Disclose: I have a long position on CHL. Data is from Google Finance and Yahoo Finance as of Oct 9, 2009.