With widespread investor concerns over the current state of Chinese stocks, there is a lot of fear and frustration over China investments right now. The issue is that all China stocks are not the same. There are different types of China stocks listed in the U.S. — state-owned enterprises, mid-cap blue chips and small-caps, each with specific characteristics. Overall, I still believe that we will see 40% upside in many of these stocks by year-end, most of it in fourth quarter, and now is the time to position for the upcoming rally.
To help you navigate toward some promising China investments, here are 5 stocks that show potential for growth this earnings season.
Top China Stock #1: China Valves Technology (CVVT)
Currently, the largest non-state owned industrial valve manufacturer in China, China Valves Technology (CVVT) has shifted its focus to high-end technology products used in nuclear power and petrochemical industries. As a result, profit margins have improved significantly.
From 2005 to 2009, the company’s total revenue soared from $20.0 million to $95.4 million. Gross profit grew from $8.2 million to $46.8 million and net income jumped from $3.7 million to $24.9 million in the same period. After the sharp market sell-off since April, the company is trading at only 9x this year’s PE, which is dirt cheap for a company growing earnings at 61% a year. Looking forward, I believe the company not only can maintain but could also further improve its margins as it captures even more market shares in high-end segments.
Top China Stock #2: China Yida Holdings (CNYD)
China Yida Holdings (CNYD) is an integrated travel company that I believe will win big. Like Disney, China Yida operates TV stations and scenic parks and is a diversified entertainment and leisure enterprise focused on Chinese media and tourism. CNYD has an impressive average annual earnings growth rate of 63% in the past four years, a dirt cheap valuation of less than nine-times its trailing 12 month PE, and a unique business model similar to Disney. The company has three brand-new parks in development and expects to generate revenue from these sites by the end of 2012. CNYD is a great bet to snap up now before it attracts additional institutional attention and shares head sharply higher.
Top China Stock #3: China Life Insurance (LFC)
The largest insurance company in China, China Life Insurance (LFC) has a dominant market share of 51% in a country where the insurance industry is growing a solid 15% a year. In the coming years, I look for China’s insurance industry to grow rapidly and eventually become the largest insurance market in the world. China Life Insurance is expected to consolidate its leading position in major Chinese cities due to the new accounting standards that will soon be published by the China Insurance Regulatory Commission. Estimates based on the top three Chinese insurers’ 2009 annual reports show that China Life Insurance would remain leading position in 33 major cities. These accounting changes don’t really reflect any changes to the company’s business, but nonetheless remain a positive for existing investors since they show the company in an even brighter light.
Top China Stock #4: China National Offshore Oil Corporation (CEO)
China National Offshore Oil Corporation (CEO) continues to benefit from BP’s disaster in the Gulf. Currently, CNOOC is in talks with BP to buy 60% of its shares in Pan American Energy, Argentina’s second-largest oil producer. CEO acquired a 20% stake in Pan American earlier this year from Argentina’s Bridas for $3.1 billion, which values BP’s stake at about $9 billion. BP has said it is looking to sell off about $10 billion in assets over the next year in order to raise cash for expenses related to the Gulf spill. Keep an eye on this deal and expect that it could be fairly bullish for CNOOC if it goes through.
Top China Stock #5: Sorl Auto Parts (SORL)
As the largest manufacturer of air-brake valves, Sorl Auto Parts (SORL) has favorable economies of scale over its domestic and foreign competitor. Its production capacity is equivalent to the sum of its next three competitors. Looking forward, for the second quarter of 2010, SORL’s management is expecting sales to be approximately $47.0 million and net income to be approximately $4.3 million, a sharp 42% jump from the $29.7 million in sales and $3.0 million in net income a year ago. Currently, the company’s stock is trading at about 10 times this year’s projected earnings, which is much cheaper than the average valuation of listed Chinese auto part companies, with an average price of about 14 times their 2010 earnings.
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