Two Chinese Up–and–Comers

01/06/2010 1:51 pm EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Two growing companies have had some challenges, but they will benefit from the growing wealth of Chinese consumers, writes Paul Goodwin of the Cabot China & Emerging Markets Report.

In the spirit of the season, it seems fitting to feature a newborn stock, but I'll [start with] one that's been public for a little more than two years. It's CNinsure (Nasdaq: CISG), a fast-growing Chinese insurance company that's riding the growth of the Chinese middle class to excellent gains.

CNinsure (the name is probably supposed to mean China Insure) was incorporated in 1999, and had a hard time getting out of the shadow of China Life (NYSE: LFC). But with a good mix of property, casualty, and life insurance, the company is thriving in a country in which people have more and more to protect.

The company's revenues have been growing quickly, up 92% in 2007 and 105% in 2008. After-tax profit margins are also robust, reaching 25.8% in [the third quarter].

Chart-wise, CISG made a big off-the-bottom move, ripping from $7 in May to $25 last September. Since that peak, the stock has been consolidating sideways, and is now trading in a very tight range with support at 20 and resistance at $22. [Shares closed at $21.16 in New York Tuesday—Editor.] Volume has been generally falling since late October, but the New Year should bring some renewed interest.

[My other] stock pick is a new initial public offering from China that has a great pedigree. It's Shanda Games (Nasdaq: GAME), the revenue-producing portion of Shanda Interactive Entertainment (Nasdaq: SNDA) that was spun off from the parent company on September 27th.

Shanda has been around for a while, offering a growing lineup of online games, all the way from casual time-wasters to immersive massively multiplayer online role-playing games like Dungeons and Dragons Online.

It's not clear why Shanda Interactive wanted to kick Shanda Games out the door. But after a post-IPO droop that pulled the stock down from $12 to $9, GAME has shown some life, jumping back on top of its 25-day moving average. [Shares closed at $10.68 on New York Tuesday—Editor.]

Like a racehorse with good breeding, GAME is an interesting bet on the popularity of online games in China, because it has the experience of Shanda's long history behind it. It will bear watching.

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