Finding Bargains in China's Sell-Off

03/01/2007 12:00 am EST

Focus:

John Christy

Founding Editor, Forbes International Investment Report

John Christy III, editor of Forbes International Investment Report, says China is still a long-term buy despite the recent carnage, and he finds some attractively priced vehicles for investing there.

Chinese stocks got slammed with a 9% decline Tuesday, the worst single-day beating in a decade. The culprit? The Chinese government said it would begin cracking down on margin trading to cool off the country's red-hot stock market boom. This is the second major sell-off this month to come as a result of government chatter.

Cheng Siwei, vice chairman of China's National People's Congress, spooked investors earlier in the month by declaring that 70% of the Shanghai exchange's listed companies will probably be money losers for investors. Cheng also noted that less than a third of China's publicly traded companies measure up to Western standards. Ouch. If that's what Chinese officials think about their market, no wonder investors are bailing out.

Government [officials’] comments on the stock market never seem to work out the right way. Remember Alan Greenspan's infamous "irrational exuberance" comment? He uttered those words in December 1996, just as the bull market was cranking up.

So, is the recent correction a similar buying opportunity in a long-term Chinese stock market bonanza? Long term, China is still a buy. But for now we need to tread extremely carefully. There are a few good companies that still look attractive—even more so after the market's recent panic attack.

One example is China Medical Technologies (Nasdaq: CMED). The company, which makes medical equipment such as cancer-screening machines, reported a 55% preliminary increase in earnings this week. With its market cap of $700 million, you're also taking a small-cap risk, but for patient investors it could turn out to be a long-term winner.

The recent sell-off is also a great chance to scoop up some shares of advertising outfit Focus Media (Nasdaq: FMCN). Focus's latest quarterly profits just tripled, once again blowing away analysts’ expectations. The stock's not cheap—about 30 times earnings—but it's in a prime position to benefit from a surge in advertising spending in the run-up to the 2008 Beijing Olympics. Focus' earnings could easily double over the next few years.

An interesting alternative to Mainland China companies is the iShares Taiwan index (Amex: EWT). This exchange-traded fund plunged 6% in the wake of China's sell-off, despite the fact that the Taiwan market has vastly underperformed China and is considerably cheaper. Only 100 miles of water separate the two economies, and both will benefit from China's future growth and increased trading activity.

Chinese stocks are not for the faint of heart. But it's way too early to give up on this increasingly important economy.

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