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China stocks were the toast of Wall Street in 2007 and early 2008 as more and more Chinese companies listed their shares on U.S. exchanges and American investors seemed to gobble these stocks up at every turn. The rapid rise didn't inoculate Chinese ADRs from the doldrums of late 2008, but as the stocks have rallied off their March lows, China shares have been among the leaders.
Sure, the S&P 500's 10% year-to-date gain is nice, but that pales in comparison to the iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI), which is up 40% in the same time frame. That's a rapid rise in short amount for FXI and Monday's trade showed there might be some dents in the armor of Chinese ADRs as FXI tumbled $1.91, or 4.6%, to $39.13 and that decline highlighted drops in many of the major Chinese ADRs.
Let's look at few of China's high-fliers to see if problems are abound or if we're just due for a short-term pullback.
| Company |
Forward P/E |
YTD Performance |
| China Unicom (NYSE: CHU) |
22.5 |
15% |
| Ctrip.com International (Nasdaq: CTRP) |
32 |
115% |
| Longtop Financial Technologies (NYSE: LFT) |
19 |
80% |
Dialing Up Returns
When it comes to Chinese plays on the mobile phone market, most investors think of China Mobile (NYSE: CHL), but don't sleep on China Unicom. China Unicom has 21% market share in China and even if it continues to play second fiddle to China Mobile, being number two in a mobile phone market the size of China's isn't a bad deal.
China Unicom officials said earlier this year that they expect to add 20 million to 30 million subscribers within a year. Think about it this way: Verizon Wireless has just over 72 million subscribers, so if China Unicom added 30 million subscribers two years in a row, it would likely be bigger than Verizon.
A lot of the buzz surrounding China Unicom, which is up 19% year-to-date, has been due to speculation that Apple (Nasdaq: AAPL) would choose China Unicom as the Chinese carrier for the iPhone. Last week, a rumor got started that 5 million iPhones would ship to China for China Unicom to sell, but that rumor proved false with China Unicom only confirming that it is in talks with Apple.
China Unicom is packed with long-term potential and even pays a dividend, albeit small at 29 cents a share, which many Chinese ADRs do not.
Online Travel is On Fire
Purveyors of online travel services like Priceline.com (Nasdaq: PCLN) and Expedia (Nasdaq: EXPE) have enjoyed the recent market rally, surging 110% and 150%, respectively, year-to-date. Those are boffo performances, and Ctrip.com, the Chinese equivalent of Priceline, is up 115% year-to-date.
The returns for all these companies are somewhat vexing based on the assumption that businesses and consumers cut back on travel when the economy is weak. Even more perplexing is Ctrip.com's performance given how notoriously frugal Chinese consumers are. Still, the company's second-quarter earnings increased by 32% and beat analyst estimates. The best news might be that Ctrip actually increased sales during the second quarter, rather than cutting costs to beat estimates.
If you're a believer in the emerging middle class in China, then Ctrip could make for a good bet. Keep an eye on the stock to see if it can finally clear the $50 resistance level and hold.
Betting on Financials
Longtop Financial makes software and provides information technology services to financial firms and has nearly doubled year-to-date. Despite that stellar run, the Tiger Global hedge fund has been reducing its position in Longtop, so if you like to follow the so-called smart money, it might be wise to think twice about Longtop.
On a technical basis, it appeared that buyers were more active in the name than sellers, at least prior to Monday's 8.3% drop. Longtop is like so many Chinese stocks: loaded with long-term potential, but looking somewhat overbought and risky in the near-term.
Bottom Line: Topped Out
Calling tops and bottoms is one of the hardest things to do investing and it's even hard to do with Chinese stocks. Just when you think they can't go any higher, they do. If we do get a pullback, consider it a buying opportunity for the likes of China Unicom and Ctrip.com. (To learn more, see Investing In China.)
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