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Opportunity In China's "Under $20" Club?
Posted: Oct 16, 2009 14:35 PM by Todd Shriber
One of the most alluring things about investing in Chinese American depositary receipts (ADRs) is the potential these stocks pack to run hard and fast, delivering outsized returns in relatively short amounts of time. Hold the right Chinese stock long enough and you could have returns that some investors only dream of, by scooping an unheralded stock for less than $20 and riding it into the triple digits. (For an overview of ADRs, check out ADRs: Invest Offshore Without Leaving Home.)
Think it can't be done? Think again. Shares of PetroChina (NYSE:PTR), the Chinese oil giant, traded for around $16 in 2000. Helped by the oil bull market, the stock flirted with $250 a share in October, 2007. Shanda Interactive (Nasdaq:SNDA), the online multimedia and entertainment firm, traded for around $13-14 in 2006. The shares currently go for nearly $50 and have traded as high as $65. There are more examples of such boffo returns, but let's not get bogged down in history.
With an eye toward the future, we ran a screen for Chinese ADRs currently trading under $20 and found nearly 120 names. Obviously, we can't cover all the names we found here, but we selected three that might have the potential to one day join the legion of Chinese high-fliers.
(NYSE:GA) Forward P/E: 12, 52-week performance: 13%
Nam Tai Electronics (NYSE:NTE) Forward P/E: 19, 52-week performance: -26%
Yanzhou Coal Mining (NYSE:YZC) Forward P/E: 16, 52-week performance: 144%
Giant Problems in Online Gaming?
Giant Interactive is at the forefront of what should eventually prove to a very lucrative and profitable market in China: online computer and video games. Giant Interactive develops online games and is trying to figure out ways to derive more revenue from gamers that use its products.
That is proving to be a difficult endeavor, as Giant Interactive said earlier this month it anticipates third-quarter sales will come in between $39.9 million and $42.7 million, below analyst estimates of $50 million. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
Giant is a tricky play, given that it has lagged rivals such as Changyou.com (Nasdaq:CYOU) and Netease.com (Nasdaq:NTES). And if newly-public Shanda Games (Nasdaq:GAME) takes off, investors could leave Giant in the dust. That said, Asia is fertile ground for online gaming, and with China being the world's largest market but with scant penetration at just 19%, there should be ample opportunity for Giant Interactive to get things going in the right direction.
The Laggard of the Group
Nam Tai Electronics is certainly the laggard of the trio we're highlighting here, as the ADRs are down 26% over the past 52 weeks. That performance looks even worse when measured against the iShares FTSE/Xinhua China 25 Index (NYSE:FXI), which is up nearly 65% in the same time. It's not surprising that Nam Tai's shares have struggled. The company supplies electronic components to makers of televisions and other consumer electronics and as consumers have pared purchases of those products, Nam Tai's stock has felt the pain.
That gloomy scenario aside, Nam Tai has net cash in excess of $230 million, a truly robust amount for a company with a market cap of less than $251 million, and that leads some analysts to believe there's a $7-plus stock lurking here.
The NTE ADRs yield nearly 16%, which is sort of an accidental high yielder situation, but Nam Tai has the cash to support the 88 cent-per-ADR annual payout.
A Play On Chinese Coal Demand
China is the largest consumer and producer of coal in the world and that makes Yanzhou Coal, the fourth-largest coal producer in the world, an intriguing China energy play. The company is trying to expand its reach via an attempted acquisition of Felix Resources of Australia, for which Yanzhou is offering $2.9 billion.
Yanzhou has caught the eye of at least one institutional investor, as Templeton Asset Management recently upped its stake in the coal miner. If you're a believer in China's seemingly never-ending need for sources of energy, Yanzhou appears to be an inexpensive way to play that trend. With global coal demand expected to grow 55% by 2025, Yanzhou may not be this cheap for long.
Two for the Money, One to Wait On
Yanzhou Coal may be the safest name of the trio we mentioned here, and China's long-term energy needs certainly bolster the company's prospects. Combining the low price tag, cash flow and dividend makes Nam Tai Electronics almost too good to resist at least taking a nibble at, but at this point it might be best to wait on Giant Interactive.
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