3 China Stocks in the “Sweet Spot”

PUDA, YUII and TSTC are strong buys


The China A-Share market was up a cool +10% in July — outperforming the S&P 500, up +6.9%, and the Dow, up +7.1%. And that’s just the market average. The fact is that a number of stocks in China have been surging during this “sweet spot” and have returns that significantly outpace even China’s surge in July.

I don’t want you to miss out, so I’m offering up three of my top China stocks that have dramatically outperformed the major indices. They are telecom stock Telestone Technologies (NASDAQ: TSTC), agriculture stock Yuhe International (NASDAQ: YUII) and energy service stock Puda Coal (AMEX: PUDA).

Sweet Spot China Stock #1: Telestone

A top Chinese telecom stock, Telestone Technologies soared a whopping 44.2% for the month!

China has more than 750 million mobile subscribers — easily making it the world’s largest mobile telecommunications market. And the country continues adding to that total at a breakneck pace, with an estimated addition of the between six to seven million subscribers every month!

To handle the volume of mobile subscribers, China telecom carriers have built large-scale 3G networks in hundreds of cities. This massive network rollout is now largely complete, and I now expect mobile carriers to focus on adding wireless enhancement equipment and solutions to provider better wireless coverage. That means big business for Telestone.

Now, in addition to the anticipated need for wireless enhancement technology, there is also the Chinese government’s recently-announced plan to promote what’s called “network convergence.” This project is aimed at integrating the telecommunications and broadcast industries in order to eliminate network overcapacity and emphasize the importance of network sharing. And TSTC is sitting squarely in the middle of the growth.

Sweet Spot China Stock #2: Yuhe

Fast growing Chinese chicken producer Yuhe International was up a very significant 31.3% in July. This is just part of the ag stock’s success recently, and I expect more gains to come.

China is now the second-largest consumer of poultry in the world — second only to the U.S. This isn’t a surprise to me given the rapid wealth creation in China. Over 100 million Chinese families who survived on hand-to-mouth subsistence as recently as 15 years ago can now afford more and higher quality food — particularly more high-protein foods such as chicken. So, as incomes rise, eating habits change, and consumers are willing to try new foods.

Recent statistics show that chicken consumption as a percentage of total meat consumed has doubled over the last decade, and that trend will likely continue given the traditional Chinese diet of chicken as a main source of protein. And this company is the main provider of that source of protein for Chinese consumers.

Overall, Yuhe International is leveraged to the rising yuan and is a play on the burgeoning middle class in China. In addition, the company’s strongest results generally occur in the second half of the year due to the seasonality of the chicken broiler business, so I’m looking forward to second-quarter earnings results as a positive catalyst for the stock. I believe that YUII has the potential to move 50% higher by year-end.

Sweet Spot China Stock #3: Puda

Leading Chinese coal technology and service company Puda Coal had a great July, jumping 21.4% for the month! I expect more gains to come, too.

China is one of the greatest growth stories in world history. The county’s massive infrastructure spending and booming economy are driving demand around the world and two of the Red Dragon’s biggest appetites are for energy and steel — both of which require a large supply of coal.

So it’s shouldn’t come as a surprise that China is the largest consumer of coal in the world. In light of the growing environmental concerns and increasing demand for clean coal — with the least possible amount of harmful sulfur dioxide emissions — there is enormous demand for “coal cleaning.”

And as China’s demand for coal continues to rise, the coal cleaning business will also continue to be a prominent part of the industry. Well, this company is the company in this space, as it has operated coal washing plants for more than 15 years. The company currently owns three plants that produce customized, cleaned and finished coal products, and its operations are likely to expand due to government regulations.

During the past two years, the Chinese government has closed a large number of small coal companies in an effort to address environmental and safety issues. These coal mines are being consolidated, restructured and sold to companies with strong capital, clean technology expertise and experience in this industry — such as PUDA — and in fact the company was recently awarded the exclusive rights to purchase eight fully-operational thermal coal mines. I am very bullish on Puda Coal and I think it will be a very big winner in the months ahead.

China is in a growth sweet spot right now. Strong, slow, steady and sustainable growth; a Goldilocks scenario — and that’s something investors should continue banking on in the weeks and months to come.

As of this writing, Robert Hsu was recommending all three of these stocks to subscribers of his Asia Edge newsletter.

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Article printed from InvestorPlace Media, http://investorplace.com/2010/08/china-stocks-in-sweet-spot/.

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