The Top 20 Chinese Value Stocks

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

By Hao Jin

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 (NYSE:IBM) PC's, natural resources and real estate, etc.

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

I went though all of the Chinese stocks listed on U.S. stock exchanges with a 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 Corp of China

(NYSE:ACH)

7.9

16.02B

410%

China Petroleum &

(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 a P/E ratio of less than 18. They seem to still be reasonably priced, even though some of them have bounced back more than 400% from their 52-week-lows. Of these top nine inexpensive stocks, three are in the commodity, technology and railroad sectors.

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 found that adding a significant allocation to commodities substantially improves portfolio performance. The performance is more dramatic for indirect investment via the equities of commodity-related 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 to 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 Cash Flow

3.1

1.0

0.3

0.2

Technology

China Mobile Ltd 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 Cash Flow

0.1

2.1

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

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

Railroads

Below is a comparison between Guangshen Railway 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 Cash Flow

2.4

2.6

ETFs

The followings are mainly China related ETFs/ETNs, including short and currency:

Fund Name

Ticker

Net Assets

Portfolio P/E

iShares FTSE/Xinhua China 25 Index

FXI

11.30B

14.6

SPDR S&P China

GXC

455.46M

17.0

PowerShares Gldn Dragon

PGJ

439.50M

16.1

UltraShort FTSE/Xinhua China25

FXP

269.93M

Claymore/AlphaShares China Small Cap

HAO-OLD

182.13M

15.4

WisdomTree Dreyfus Chinese Yuan

CYB

136.81M

Claymore China Real Estate

TAO

79.43M

16.0

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

Small Cap

Superior growth usually comes from small to mid-cap stocks. I lowered the criteria to include any profitable Chinese stocks with a 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. Below is its stock price chart over the last 2 years.

Click to enlarge:

Conclusion

Investors usually have short-term memories. We seem to be driven by the 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 rise 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 investment horizon, you might want to consider these profitable and still relatively inexpensive Chinese companies presented above.

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

Original article