China Growth Stocks

[Shengli]

Evaluating hot Chinese stocks
Commentary: E-commerce and media picks for February

http://www.marketwatch.com/story/evaluating-hot-chinese-stocks-2011-02-01?siteid=yhoof


By Gil Morales and Chris Kacher
LOS ANGELES (MarketWatch) — China recently passed Japan as the world’s No. 2 economy, and it’s likely it will also surpass the United States at some point in the near future.



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• See Trading Strategies full report
The expansion in China’s economy is also clearly reflected in the performance of its stock markets, which have done well in the New Millennium’s initial 2001-2010 decade.

Now, given the present global outlook, it seems likely the growth curve for both will remain robust for many years — if not decades.

Of course, as in any developing economy, there will be some hiccups along the way, but each hiccup will likely see China’s economy and its markets re-emerge even stronger — much as the U.S. economy and markets have done for nearly 250 years. As has also been the case throughout U.S. history, China’s continuing growth will be bolstered by the steady emergence of new industries and new companies, providing fresh fodder for investors to feast on through many market cycles.

With this in mind, there are two new China opportunities we currently like — both involving companies whose shares have recently begun trading on U.S. markets as American Depositary Receipts:

E-Commerce China Dangdang.com

One of the major contributors to China’s economic growth has been the rapid emergence of the consumer class, which now represents the largest pool of buying power in the world — surpassing even the U.S. These new consumers are also relatively young, meaning they have grown up with the Internet and are much more in tune with the notion of shopping online.

That bodes extremely well for E-Commerce China Dangdang.com (DANG 28.30, -0.22, -0.77%) — which, if not quite yet the Chinese Amazon.com, is about as close as one can get as an American investor.

E-Commerce China Dangdang.com has also gotten the attention of major institutional investors. Boston-based Fidelity Management & Research, one of the largest mutual-fund managers in the world, recently disclosed a 17.6% position in the company — very interesting given that the stock has been trading less than two months.


DANG became public on Dec. 8, 2010, with an initial public offering valued at $16 per share. The stock roared out of the starting gate, nearly doubling on its first day and peaking at $30.90 a share. Since then, DANG has moved sideways, building a short consolidation around the $30 price level.

As long as DANG is able to hold the lows of this current consolidation around $25 to $26 a share, we feel investors should take a close look at the company. We believe it represents a solid international play offering both steak and sizzle since growing demand from the expanding Chinese consumer class should continue to fuel strong revenue growth, based on recent projections by DANG Chief Executive Officer Guoqing Li.

China MediaExpress Holdings Inc.

“Cheap” Chinese stocks — those selling at low prices equivalent to five or 10 times earnings — are often suspect as potentially fraudulent. However, individual investors might find China MediaExpress Holdings Inc. (CCME 17.84, -3.02, -14.48%) worth a look, if only because recent data indicate several institutional investors have done their due diligence and are beginning to take positions in the stock.

Such votes of confidence from large institutional investors — accompanied by the commitment of their investment dollars — are often a highly constructive sign for new or emerging companies.


In addition to increasing institutional interest, China MediaExpress also has a strong business model. Far more Chinese workers commute on public transit than do Americans, and CCME’s advertising services are currently featured on around 25,000 buses, with another 10,000 due to be added over the next few years.

The company is also taking advantage of its position in the bus-advertising market to steer customers to ads on CCME’s company-operated Web portal. Clients can run ads on the site, as well as in a soon-to-be-launched magazine, and customers can respond to these ads by placing orders online.

CCME was recently ranked No. 1 in the Forbes China 200 survey. This list features small- to mid-sized Chinese companies considered to have the most potential based on various metrics, including three-year weighted average revenue growth rates, return on assets, return on equity and operating margins. Over the past five quarters, China MediaExpress has grown earnings at rates of 87%, 44%, 50%, 100%, and 45%, respectively, while revenues have risen by 66%, 91%, 137%, 180% and 118%, respectively.

Based on recent chart patterns, the stock looks poised to break out to new highs above the $20 to $22 price level, and we would view it as a buy within its current trading range.

Gil Morales and Dr. Chris Kacher are both Managing Directors of MoKa Investors, LLC, operate the investment advisory website Virtue Of Selfish Investing , and co-authors of the new book, “Trade Like An O’Neil Disciple: How We Made 18,000% in the Stock Market” (Wiley, 2010). They don’t own the stocks mentioned in this column.