A Dynamic Duo of Chinese Stocks

04/03/2007 12:00 am EST

Focus:

Jim Trippon

Editor-in-Chief, China Stock Digest

A Dynamic Duo of Chinese Stocks

James Trippon, editor of China Stock Digest, finds two leading Chinese companies that trade as ADRs and that he says continue to show strong fundamentals and reasonable prices.

The Aluminum Corporation of China (NYSE: ACH), better known as Chalco, continues its rise despite the market turbulence of the past month partly due to an excellent earnings report.

The world’s number two alumina maker and China’s largest aluminum maker posted a stunning 67% increase in 2006 earnings despite having cut prices for its main product in the second half of last year.

Chalco reported a net profit of $1.52 billion for the past year, a staggering increase from profits of $907 million in 2005. The company’s excellent prospects and its glowing earnings report led to our previously mentioned recommendation to increase our Chalco holdings.

Chalco aims to boost production with a $2.3-billion development project in Australia and will expand its primary refined aluminum capacity to 3.4 million tons in 2007, giving the company control of 35% of the Chinese domestic market.

With a P/E ratio of 8.9x, Chalco is a strong buy. The company also is preparing for listing on the Shanghai Stock Exchange. This is part of a move by the Chinese government to make more domestic blue-chip firms available to the country’s own citizens as A shares. (The ADRs changed hands at $26.55 Tuesday morning—Editor.)

Chalco’s trailing-12-month dividend yield of 4.89% will look very attractive to Chinese investors during Chalco’s launch on the Shanghai market and keeps the company on our Buy list.

China Mobile HK Limited (NYSE: CHL) has fully recovered from the recent market shock, and its shares are strongly in positive territory. We believe the company is still a Buy as it continues to report good news. China Mobile increased fourth-quarter profits by 19%, even after cutting prices.

China’s largest wireless carrier, as measured by subscribers, reports that it set a new monthly record in February by adding 4.91 million new customers. Net profits rose 23% in 2006 as China Mobile added many of its new customers in the country’s rural areas.

The company says 50% of the new subscribers were from the countryside. According to China Mobile, mobile phone coverage in the countryside is only 15% despite the huge population in rural areas, leaving plenty of room for growth. Overall, China Mobile’s share of the Chinese market in 2006 rose to 68%, compared with 66% the previous year.

In the future we expect China Mobile to list its shares on the Shanghai market. In view of the company’s continuing growth, China Mobile has an acceptable P/E under 24x. (The ADRs changed hands at around $46 Tuesday morning—Editor.) With its trailing-12-month dividend just over 1% China Mobile remains among our top portfolio favorites and a top performer.

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