Powering Up with China's Market

10/04/2010 12:00 pm EST

Focus: STOCKS

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor-in-chief of China Stock Digest, says Chinese stocks are moving higher and he likes a leading power provider that should profit from the market’s growing strength.

Chinese stocks are finally beginning to respond to the economy’s robust expansion. The Shanghai Composite Index has risen 12% from its lows in July. China’s ADR Index is reflecting the optimism of mainland China with strong gains in September. (The index tracks Chinese stocks traded on US exchanges.)

One of the worries overhanging Chinese stocks has been the fear of a property price bubble. Although prices are still rising, they’re going up more slowly.

Housing prices rose at the slowest rate in eight months. Compared to a year ago, housing prices are up 9.3%. More importantly, compared to a month ago, property prices in China’s 70 major cities are flat. So, the bubble has apparently stopped expanding.

The other big worry looming over Chinese stocks was the threat of an interest rate increase or a lending freeze to clamp down on overheating in the property sector or other parts of the economy.

But so far that hasn’t happened: China’s new loans increased to 545 billion yuan ($80.5 billion) during August. We’re seeing solid increases in lending, but the rate of increase is slacking off from the big push which began with Beijing’s stimulus program in November 2008.

Major fund managers are also turning bullish on China. Bank of America Merrill Lynch conducts a survey of investment fund leaders every month. In July, 39% were bearish on China. In August, a net 19% were still bearish.

But the September survey showed a big swing. Eleven percent of respondents said the Chinese economy would strengthen over the next 12 months—a 30% swing [and] the biggest positive monthly change since May 2009.

There was an even more dramatic move from investors in the Global Emerging Markets (GEM) sector. In August, 22% of the panel were underweight China. But 22% reported being overweight China only one month later. The GEM panel remains bearish about Japan and neutral towards the US and Europe.

Huaneng Power International (NYSE: HNP) has broken into a strong up trend, exceeding all of its moving averages as power consumption in China continues to increase.

The company has just won regulatory and shareholder approval for stock offerings worth several billion dollars on Shanghai and Hong Kong. The money will be used to pay off bank loans and establish new plants and conduct repairs.

Huaneng Power generated 118.84 billion kilowatt hours of electricity in the first half of this year, 38% more than in the same period of 2009, boosted by the economic recovery and newly installed power generation capacity.

Huaneng Power realized $140.5 million in net profit for the first quarter of the year, 41% more than in the same quarter of last year. Despite its earnings increase, Huaneng has a P/E multiple of only [around ten times]. Huaneng remains a Buy up to $27 and a price target of $35. (It closed just below $25 Friday—Editor.)

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