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Are Investors too Cautious about Chinese Firms?

Wednesday - 7/10/2013, 2:59pm  ET

The last few years have been a tough battle for Chinese companies listed on American exchanges. Many of the firms that fought hard to be listed in the U.S. are now turning back home. The following three companies still look to have solid footing in the American exchanges, however, and are all extremely attractive.

YY , Yongye International and E-Commerce China Dangdang  have very bright prospects. All three are hedged on whether China performs well in the coming years, however. Betting on these companies could help to diversity a portfolio that is heavily weighted on American firms which have surged this year and could be ready for a pull back. 

I have always considered China to be a risky venture due to the low amount of data available about the welfare of the economy. Jobs reports and reports on housing sales aren't common in China, and are more guesses than anything else when they are reported. That creates a lot of risk if investing in these three companies, but stability in China could save you from disaster if recent optimism about the U.S. economy is unfounded. 

YY impresses with sales increases

The earnings per share forecast for YY is $0.84, but last year it finished with an earnings per share of $0.91. The company experienced its first profitable year out of the last four in 2012, resulting in about a 175% gain. Last year marked a 156% increase in revenue. Sales are even more impressive when compared to 2009. Since that time, profits have gone up by almost 25 times.

Analysts believe the company's stock is over-priced, with a consensus price target of $20.20 while the firm is currently priced at about $29. I have my doubts about that price point, however, as Chinese stocks have been largely avoided by those cautious about Chinese firms and this company has shown its ability to grow profits. I'm keeping my eye on this stock.

Yongye is showing stellar gains

Yonge International appears to have everything going for it. The company has increased its annual revenue in the last three years by 118%, 82% and 14%, respectively. While the revenue growth is declining, the firm has managed to make tremendous improvements in profit margin. This tells me that the firm is increasing the efficiency of its operations. Profit margins in the last three years has been relatively consistent at 24%, 23% and 22%, respectively. In 2009, however, the company's profit margin was only 3%. The company looks to have turned on the light.

In determining whether to buy a stock, I usually look for at least a 25% increase in year-over-year revenue. Yongye only managed 14% last year. Still, while the share price has only increased by about 180% since 2009, that year resulted in $98 million in revenue. This is compared to $443 million of revenue last year -- that represents a much greater 350% increase and signals an undervalued stock. The stock might not be cheap for long if investors catch on (and I'm starting to convince myself to buy this stock.) The earnings per share estimate is $2.03 this year, $2.53 for next year, and $3.16 in 2015. Enough said.

Dang's been hot

E-Commerce China Dangdang has been hot lately. Since early May when the stock was trading at about $3.80, it has surged to over $8 and is now currently trading at around $7 per share. Dang has been called the Chinese equivalent of Amazon. Both companies started out as online book retailers, and while Amazon has branched out considerably, Dang is just beginning to take that step. That is helping to fuel the company's expected 200% revenue growth this quarter.

China is a complicated play

Investing in Chinese stocks does come with considerable concern, not only because of the unpredictability of the economy, but also because of the perception of corruption at many of the nation's firms. This doesn't suggest, by any means, that the three firms covered in this report are committing fraud; it's just worth noting that the nation's business have come under fraud concerns since around 2011. If those concerns are unfounded, these three stocks are likely undervalued and reveal an opportune time to buy. Once the negative perception about China wanes, others will feel comfortable buying these firms, and then the prices are sure to increase.

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