Is Now the Time To Get Back Into Chinese Stocks?

Posted by: 0 in Untagged  on Apr 08, 2009

We Think So! We at OTCPicks.com are quite intrigued with the low earnings multiples we are seeing in many Chinese stocks. In fact, many are as low, if not lower, than those seen during the 1998 “Asian Contagion.” And while we fear that corporate profits in the U.S. will be in a secular decline (if for no other reason than the aging baby-boomers moving out of their peak spending years), economic growth in China is likely to continue to be extremely robust. Why? It’s simple. After more than 25 years of economic growth driven by exports and fixed-asset investment, China is turning towards consumption to sustain the boom. And while the average age here in the United States is 55, it’s only 42 in China. This suggests that while the U.S. baby-boomers will be exiting their peak consumption years, the largest segment of the Chinese population will be entering their peak spending years.

In fact, the Chinese government recently announced a series of policies to raise private income, including scrapping agriculture tax, raising thresholds on income tax, increasing minimum wages and civil servants' salaries, and providing free basic education in rural areas, and some health care reform will likely boost Chinese pharmaceutical stocks.

We are already seeing signs of a recovery manifesting itself in the Chinese stock market—no doubt inspired by a cut in interest rates and the country’s own $580 billon dollar stimulus package. In fact, coal miners, metals suppliers and real estate developers have already begun rising on the hopes for an economic recovery by year-end. Within the last several trading days Chinese stocks have touched their 7 months highs which is a sign things are starting to turn around.

So while we expect the Chinese economy will likely start to bounce back in 2009 as the effects of easing monetary policy and the stimulus package take hold, we think longer-term traders should be building positions in Chinese stocks NOW. As we come back out of this financial mess, China's manufacturing will come back and commodities and raw resources will roar back.

We have included an annotated chart of the China Index (CZH) below that illustrates how the Chinese stock market appears to have made a “double bottom” with the second bottom slightly higher that the first one. And while the index has not yet broken out of its trading range, the MACD is, in fact, making higher-highs. This bullish divergence suggests that higher equity prices could be in store for the Chinese stock market in the near-term. For the greatest return with the least amount of risk, we suggest considering those stocks offering the greatest relative strength.

Some Chinese Stocks to Take a Look At

We have included a select group of some of our favorite Chinese stocks that members may wish to research further.

CTRIP.COM (CTRP) provides travel services for hotel accommodations, airline tickets, and packaged-tours.

China Mobile (CHL) provides mobile telecommunications and related services primarily in China and Hong Kong. It offers mobile voice services, such as local calls, domestic long distance calls, international long distance calls, intra-provincial roaming, inter-provincial roaming, and international roaming; and voice value-added services, including caller identity display, caller restrictions, call waiting, call forwarding, call holding, voice mail, conference calls, and others.

New Oriental Education & Technology Group (EDU) provides private educational services based on the number of program offerings, total student enrollments, and geographic presence in China

Netease (NTES) operates an online community in China. It operates in three segments: Online Game Services, Advertising Services, and Wireless Value-added Services and Others

Aluminum Corp. of China (ACH) engages in bauxite mining, alumina refining, and aluminum smelting businesses in China.

China Shenhua Energy Ltd. (CUAEF) the country's biggest coal producer

Jiangxi Copper Ltd. (HKSE) One of the country’s largest copper producers.

China Natural Gas, Inc., (CHNG) The first China-based natural gas company publicly traded in the US. It currently owns and operates a 120 kilometer long compressed natural gas pipeline in Xi’an, China, a fast growing Chinese city supported by a population of approximately eight million and is the “gateway” to the broad Western regions of China.

China America Holdings, Inc. (CAAH) A holding company which owns a 56% stake in Shanghai Aohong Chemical Co., Ltd. a distributor of assorted liquid coolants which are utilized in a variety of applications, primarily as refrigerants in air conditioning systems for automobiles, residential and commercial air conditioning systems, and a manufacturer of steel non-refillable cylinders.

Shanda Interactive Entertainment Ltd. (SNDA) China’s biggest online-games provider.

Happy Trading
OTCPicks.com Publisher