Investing in China: Is Growth Unsustainable?
By Ann Sosnowski
In this article
The Shanghai Stock Exchange (SSE) has gained 300% since mid-2005.
Some former Diligent Investor Chinese stocks could offer a great “buy on the dips” opportunity in the near future.
Some Chinese trends to watch is M&A activity in banking as well as Chinese IPOs.
Investing in China: Is Growth Unsustainable?
We already know that high demand for goods, services, and commodities from China has spurred some of the biggest run-ups in the world. Global economies are growing at their fastest clips ever thanks to China's emerging market.
On Wednesday, Fed Chairman Alan Greenspan stated in a teleconference that he believed that the recent boom in Chinese stocks couldn't last, and that a correction was well due. In his own words, he fears a “dramatic contraction” in Chinese stocks.
Since opening at the beginning of 2007 at 2,728, the Shanghai Stock Exchange (SSE) has moved to 4,173 less than six months later, a gain of 53%.
Since mid-2005, the Shanghai index has gained 300%, from a value of 1,000 to its current 4,173.
Considering the strange ideologies that mix and mingle in China (a collection of homegrown Communism and imported capitalism), it's expected that if such a major correction occurs on the Shanghai index, the country's government will most likely step in to alleviate extreme losses of personal wealth.
I thought it would be interesting to look back on some American-listed Chinese companies that Diligent Investor used to own and then sold for massive gains after the February 27 Chinese correction that affected all global markets.
Investing in China: American Chinese ADRs Could Offer Buy Opportunities
China Southern Airlines (ZNH:NYSE) is the ADR that Diligent Investor sold for 96% gains on February 27. The company is a very prominent airline in the People's Republic of China with the most technically elite airplanes.
ZNH is getting more heavily embedded in Nepal and is touting it as a great tourist attraction for Chinese citizens. For the 2006 fiscal year, ZNH saw a loss of only 188 million yuan (or $24.3 million) compared to a loss of 603 million yuan in 2005 (or $78.8 million). The airline continues to see increasing passenger traffic and cargo.
ZNH's stock is currently valued at $28.43, after a slight retracement today following news of Greenspan's “contraction” announcement. The stock has moved 47.2% since the beginning of 2007, 44% since the Chinese stock correction of February 27.
The lowest this stock could fall on a correction is most likely $20 per share, which is at ZNH's 200-day Moving Average. I believe that would be a perfect time to buy shares of ZNH again.
As a transportation company in an extremely fast-moving economy, I don't see how it could lose over the next few years.
Another Chinese stock undergoing a correction is Ctrip.com International Ltd. (CTRP:NASDAQ), a travel agency in the People's Republic. CTRP is priced at $80 per share on its 10-day MA. Diligent Investor subscribers made 40% on the stock when sold on February 27, and has moved an additional 30% since.
This stock looks like it could go down to $60 per share in the short term if the Chinese economy does start to lag. However, the company did just impress investors with first-quarter profit 34% over the same last year on both airline ticketing and packaged-tour revenue.
I do consider CTRP overvalued at its current price. If it returns back to its 200-day but does not drop below it, the stock will still be in trend and could offer another great buy opportunity down the road.
Investing in China: Diligent Investor's Best Historical Stock Doesn't Look So Healthy
The third -- and final Chinese stock that Diligent Investor sold for gains on February 27 was China Life Insurance (LFC:NYSE). We sold for gains of 33% and 19% in February on half of our remaining shares. (We sold the first half in 2006 for as high as 115% gains.)
Miraculously, this stock hasn't even touched its 200-day Moving Average since the beginning of its run-up in late 2005. While this has been good for current investors, the technical picture doesn't bode well for the future.
After a quick “Adam top” (according to Bulkowski, a fast-rising topping formation with an island high), the stock has moved between $40-50 per share.
LFC is getting the hardest hit out of the three following Greenspan's comments. It's already sitting on its 50-day Moving Average. I fear that more ill news concerning the Chinese economy could drop LFC as far down to its 200-day Moving Average at $38.81 per share.
The stock's RSI is still falling and has yet to hit oversold status by a bit of a long shot.
Investing in China: Chinese Trends to Research
If you're interested in some specified plays in the China market going forward, look for some good M&A stocks, especially in the banking sector. M&A activity in Chinese banking is expected by three quarters of those polled in the industry to continue over the next five years. Last year banking deal activity totaled $64 billion in China.
Additionally, Chinese IPOs continue on. Especially this year, we saw a lot of public shares go on the market for Chinese solar cell manufacturers.
Home Inns & Hotel Management (HMIN:NASDAQ), a Chinese IPO hotel chain, has gained 84% this year.
You may want to find a recently established Chinese IPO especially in alternative energy.
As for ZNH, LFC and CTRP, I'll keep an eye on them for you and let you know if I see any great entry points.
***
Ann Sosnowski is a small and mid-cap stock analyst for Taipan Financial News. She is the editor of Diligent Investor, a monthly newsletter that balances conservative and moderately risky investments that pertain to current market trends. She is also the editor of Diligent Investor Micro-Cap Hot Sheet, a monthly newsletter that finds the hottest penny and micro-cap stocks on the market.
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Related Resources
Investing in China: Chinese IPOs (via BusinessWeek)
Investing in China: Greenspan's Remarks About the Economy (via CNN)
Investing in China: Straight Talk on China (via Forbes)