To say the third quarter was a bad one for the Chinese stock market would be an understatement — it was downright awful. The Shanghai Composite Index fell nearly 40% after peaking on June 12. The past three months turned out to be a wake-up call investors never expected to get.
And yet, there’s an interesting upside to the implosion … a large swath of Chinese stocks can now be scooped up at bargain prices after they were all beaten down indiscriminately over the course of the past three months.
To that end, investors who still believe in China’s growth story — and can stomach the inherent risk of getting involved in the Chinese stock market again — here’s a closer look at five names that didn’t quite deserve the drubbing they got.
Mindray Medical (MR)
Mindray Medical isn’t exactly the most commonly-touted name one hears when scouring the Chinese stock market for trading ideas, but that’s not a bad thing. In fact, it may be a very good thing. Being a bit off-the-radar means Mindray Medical (MR) trades more on quantifiable value and less on hype.
Mindray Medical makes a variety of medical equipment, including patient monitoring devises, in-vitro diagnostics, and imaging systems just to name a few. Business has been … OK. Sales have become a little choppy, and margins seems to be thinning a bit, so much so that Mindray Medical was forced to cut its income guidance to 30% less than what it earned in 2014.
The steep cuts in its guidance, however, may be sandbagging to set up a nice finish to the end of the year. At a trailing P/E of only 15 and with the possibility of a buyout floating in the ether, MR is one of a few Chinese stocks with a compelling enough risk/reward scenario to find out for sure.
Youku Todou (YOKU)
Youku Todou (YOKU) isn’t as obscure as Mindray … which is to say, most U.S. investors have at least heard of Youku. Still though, it’s hardly among the heaviest hitters found in the Chinese stock market.
Youku Todou is like a combination of YouTube and Netflix (NFLX), catering to Chinese consumers. Perhaps more important to current and would-be owners, though, YOKU isn’t a profitable company right now, and isn’t expected to be anytime soon; 2018 is the projected year to plausibly expect profitably.
So how did YOKU land in a list of Chinese stocks to buy after the Chinese stock market went through a meltdown? Because, like so many U.S. stocks, the story and potential is more important than profits, and the Youku Todou story just got really good again.
It remains to be seen if this will make a dent or not, but with Youku recently striking a content deal with Paramount at the same time internet-usage in China is reaching a tipping point, YOKU may reach the endzone sooner than most people realize.
While Youku Todou is still a somewhat marginal name to U.S. investors, Baidu (BIDU) certainly isn’t. Indeed, it may be the most recognizable name from the Chinese stock market for investors outside of China, based on its sheer dominance of its particular market.
Baidu is the Google (GOOG, GOOGL) of China, facilitating nearly 80% of the country’s web traffic in the second quarter of this year.
Also very Google-like are the company’s revenue and profits. The top line grew 53% last year — largely in step with the nation’s ongoing adoption of all-things-internet — while earnings grew 25%. Similar growth is anticipated for this year and next year.
That bullish outlook may still underestimate just how much growth is in the cards following a recent announcement, however. As it turns out, Microsoft (MSFT) has opted to make Baidu the default search engine on new Windows computers sold in China, as well as the default search engine for those who update to Windows 10 online.
China Life Insurance (LFC)
Compared to Baidu and its news, China Life Insurance (LFC) may seem downright boring. That’s OK, though — a little boring can be good for a portfolio in the long run.
Just as the name says, China Life Insurance is an insurance provider in China … a product that tends to produce at least slightly more reliable revenue than some of the sexier stocks of the Chinese stock market. Just look at the long-term revenue and profit trends from LFC.
Where LFC stands out among the rest, however, is in its valuation. Thanks to the 34% selloff since May, China Life Insurance shares are trading back at a palatable P/E of 13.9.
The counterargument is that the 71% increase in the company’s earnings during the first half of 2015 was mostly driven by a stock market rally that has unraveled in the meantime. But, with the nation’s leaders finally back in some semblance of control and ready to inject some real stimulus, LFC may be well-positioned to ride a recovery rally from Chinese stocks.
Cheetah Mobile (CMCM)
Last but not least, years of work done by Cheetah Mobile (CMCM) are poised to pay off next year. Yet, few realize and appreciate how big this budding leap into profitability is apt to be for CMCM.
Cheetah Mobile has a lot of hands in China’s mobile market, including apps and mobile games, as well as a mobile ad platform for advertisers. CMCM’s claim to fame, though, is its suite of security and performance apps for mobile devices.
The company’s top-line growth has been impressive, even if that growth has come through acquisitions as much as organic improvement. More deals are on the way, but next year looks like it could be the year all these acquisitions start to give the company enough scale to really widen margins … margins that have already started to widen more than expected.
If all goes as expected, per-share profits could jump from $1.87 this year to $6.90 next year, finally validating the company’s oft-criticized initiatives.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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