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Published: July 20, 2010
Get ready for the China collapse. Virtually
every major media outlet has weighed in with dire reports that
the Chinese economic miracle is about to come to an abrupt end.
These Chicken Littles note that any strong asset class that
looks like a bubble must come crashing down. In the United
States it happened with dot-com stocks, it happened in the
housing market -- and it will surely happen in China. Or so they
say.
Never mind that Chinese economic figures show few signs of
cooling. Or that Chinese consumers are joining the middle class
at a fast pace. Or that these consumers are buying up goods and
services out of their savings rather than the U.S. predilection
for debt-fueled spending binges.
Slowing Down From Warp Speed
That's not to say China doesn't face some challenges. Too many
office buildings have been built, which will lead to some
troubles for the banking sector. And the European economic
slowdown is crimping exports. So it's not likely that China will
maintain the robust growth rates of +8% to +10% exhibited during
the last five years.
But even an economy that grows at a steady +4% to +5% pace would
still represent a great opportunity for global investors. And
China is unlikely to cool much below that rate. The country's
decade long run of rising cash reserves allows the government to
stimulate its way out of any unexpected speed bumps. The key is
to further develop domestic consumption by continuing to create
the conditions that bring more workers into the middle class.
That's good for China -- and its trading partners.
We screened for a list of U.S.-listed Chinese companies that are
worth at least $200 million. We then narrowed the list to
companies that trade for the lowest forward price-to-earnings
(P/E) ratios. The results are in the following table.
My favorite names in the group:
- China Security & Surveillance (NYSE: CSR), which
is helping Chinese authorities to beef up security in dozens
of mid-sized and large Chinese cities. For those who can
stomach the Orwellian nature of the business model, know
that social unrest is one of the biggest concerns of the
Chinese government, and officials are spending accordingly.
That price-to-earnings ratio (P/E) below five is quite
unusual. The multiple may be in for an upgrade when the
company reports quarterly results next Monday, July 26.
- A-Power Energy (Nasdaq: APWR) has emerged as a
leading provider of alternative energy systems in China. And
plans call for spending on green energy to keep climbing at a
fast clip, regardless of how the broader economy fares. Earnings
are likely to be flat this year, but could move +30% higher next
year. The P/E multiple of just six times next year's projected
profits is a stark reminder of just how unloved these stocks
are.
- Deer Consumer Products (Nasdaq: DEER) is a pure play
on consumer spending, as the company makes a range of
counter-top kitchen appliances for the Chinese and export
markets. Profit estimates have been steadily rising for Deer for
much of the last year, yet shares trade for half of the 52-week
high.
Action to Take
--> Here in the United States we talk about
stocks being cheap when their price-to-earnings (P/E) ratio
falls to around 10 or 12. Yet many Chinese stocks trade for
half of that multiple, as the table above indicates. These
companies may have hiccups along the way, but they have been
and will be great growth stories. When sentiment about China
turns, these stocks could quickly zoom ahead. It may happen
next month, It may happen in two years. So patience is a
virtue.
-- David Sterman
Staff Writer
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