5 Top China Plays Now

08/26/2011 12:13 pm EST

Focus: GLOBAL

Robert Hsu

Editor, China Strategy and Asia Edge

While Chinese stocks have taken a big hit…along with just about every other equity market out there… the correction in these markets is more a case of collateral damage than anything else, writes Robert Hsu of China Strategy.

Believe it or not, China’s economy still is growing at a breakneck pace, with GDP growth of 9.5% year over year in the second quarter.

Looking forward, I expect that market liquidity will remain benign, especially considering that Fed Chairman Ben Bernanke reiterated the Fed’s commitment to a near-zero interest rate environment for the next two years. Coupled with strong corporate earnings, the current sell-off is more like 1998 than 2008.

There is a growing disconnect between the US economy and corporate earnings. S&P 500 companies are continuing to outpace expectations and post record earnings, with earnings growing by double digits—especially companies that derive their profits from China. I continue to be of the opinion that the strong economy in Asia should help emerging-market stocks outperform for the rest of the year.

The second-quarter earnings season is winding down for many US companies, but Chinese companies tend to report later in the season, so we still have several left to go.

More than 90% of the S&P 500 have reported second-quarter earnings, and the season has been quite strong so far. Unfortunately, however, the macroeconomic news has weighed on the broad markets, and even big earnings surprises aren’t always enough to send shares higher.

The sell-off in the past few weeks is the worst in more than two years, but given the current low-interest-rate environment and positive earnings growth—two key drivers of stock-market performance—this selling pressure is overdone.

Just one company we follow reported earnings recently:

51Job, Inc. (JOBS) reported its financial results for the second quarter of 2011 on August 4. Some highlights:

  • Total revenues came in at 332.4 million yuan, an increase of 26.7% from 262.4 million yuan year-on-year.
  • Revenues from online recruitment services climbed a whopping 49%, while print advertising revenues declined 27.8%.
  • Gross profit for the second quarter increased 34.1%, while gross margin expanded to 71.8%, compared with 68% year-on-year.
  • Net income for the second quarter increased 53.6% to 83.5 million yuan, representing earnings per share of 2.82 yuan.

Looking forward, the company expects for revenue to come in at a range of 335 million yuan to 345 million yuan. Overall, the company continues to make progress on its strategic initiatives, and has strongly increased spending per employer in its online business, as well as expanding its customer base in existing and new geographic regions.

Shares sold off slightly after the earnings report, since EPS just slightly missed analyst expectations, but investors quickly realized that the long-term growth story was still intact and shares quickly climbed back. Going forward, one day of volatility will not affect fundamentals of this company and I remain bullish on JOBS. Buy it.

NEXT: 4 More China Plays

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Baidu.com (BIDU)
Baidu has inked a deal with BMW to provide its search services inside its vehicles sold in China. The two will work on a platform that will enable car owners to read e-mail, view maps, and access other information.

Also this week, Baidu has acquired about 40% of Chinese e-book seller Fanshu.com. Both these developments are a positive for the company.

There is also a rumor circulating in China that Baidu will acquire Toudu, one of the leading online video Web sites in China. Toudu is filing for an IPO next week. However, in the current market situation, I am skeptical of how well the IPO will be received. As a result, Baidu may step in.

I think the deal would make sense for Baidu, whose Qiyi video service continues to gain steam in challenging Youku.com (YOKU) and Sohu.com (SOHU) for online video supremacy. However, for now this remains unconfirmed, and the Toudu is moving forward with its IPO plans. Buy BIDU.

BHP Billiton (BHP)
The miner has agreed to purchase the iron-ore contract mining division of contractor Leighton Holdings, which services BHP Pilbara operations. This will allow the mining company to switch to an owner-operator model, leading to reduced cost and increased safety oversight.

Iron ore accounts for about 40% of BHP’s earnings, and the move here is a good one for the company.

In addition, BHP chairman Jacques Nasser recently discussed in an interview with China newswire Xinhua that his company is confident about sustained growth in China. Nasser said the global market turmoil has not changed the company’s view.

Nasser said: "China will continue to grow. I was there recently, and I walked away believing their focus was right, that we may not see 10, 11, 12% growth anymore, but we will see 7, 8, 9% growth, and the texture of the growth may change." Buy BHP.

Louis Vuitton Moet Hennessey (LVMUY)
The company’s tender offer for Bulgari has been approved by the Italian market regulator, and the acceptance period of the offer will begin on August 22. The deal, worth about $5.2 billion, is in line with LVMH’s goal to increase exposure to emerging markets. LVMH expects that Bulgari’s sales will climb to a record 1.16 billion euros this year.

The deal represents the company’s biggest deal in at least a decade, and will double the size of LVMH’s watches and jewelry division, which are in my opinion the company’s relative weak spot. As I’ve mentioned, I am very positive on this takeover deal, and I believe the Bulgari brand coupled with LVMH’s management, marketing prowess, and operations makes this a win-win. Buy LVMUY.

New Oriental Education (EDU)
The company will change the ratio of its shares on August 18—essentially the same thing as a four-for-one split. So, if EDU is trading at $120, shareholders will receive four shares worth $30 each.

As I’ve mentioned, I think the stock split is bullish for stock performance, because more small retail investors may be interested in purchasing EDU stock at the lower price.

A good example of this stock split effect is Baidu. Baidu did a 10-for-1 split last year when the share price was around $800. Since then, Baidu’s price has almost doubled! EDU is a buy.

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