The Fall and Fall of China

If you think that some of your investments in Chinese stocks have been faltering lately, just imagine if you had backed up the truck on some of the country's more recent stateside IPOs.

It's not pretty. Take a look.

IPO
Date

IPO
Price

1/16/08
Price

Loss

Xinyuan Real Estate (NYSE: XIN  )

12/11

$14.00

$9.90

(29%)

ChinaEdu (Nasdaq: CEDU  )

12/10

$10.00

$6.85

(32%)

China Nepstar Chain Drug (NYSE: NPD  )

11/8

$16.20

$13.94

(14%)

Giant Interactive (NYSE: GA  )

10/31

$15.50

$11.44

(26%)

We're not talking dog stocks, either. Nepstar, a leading drugstore chain in China, was supposed to be an all-weather player. Giant Interactive is the company behind the country's fastest-growing online game. Xinyuan is a homebuilder in a country of 1.3 billion where increasingly empowered citizens want to trade up their homesteads. ChinaEdu is there for the logical vocational enlightenment.

And we're just skimming the surface when it comes to the horror show that some of China's ugliest IPOs have become. Xinhua Finance Media (Nasdaq: XFML  ) and Noah Education (NYSE: NED  ) have gone public over the past year, only to find their shares trading today for less than half their IPO prices.

I won't call today the bottom. I haven't earned that right since I failed to call the top. However, I do have some words of encouragement for anyone who still has an oar in the Chinese investing waters.

1. The selloff has made these shares cheaper
Naturally, lower prices make all stocks more compelling values, but have you seen the forward multiples that some companies are fetching these days? Nepstar is trading at 28 times forward earnings. That may seem high for a drugstore chain, but this is a company that is looking to post a 44% increase in earnings growth this year. Giant Interactive's 2008 P/E is just 15, and it, too, is growing at a quicker pace.

Xinhua Finance Media is actually trading for less than 8 times forward profitability. Sure, Xinhua is a tricky one. The company has had its share of scandal in its brief public life. We're also only talking about a single major analyst following the downtrodden stock. However, what if the lone analyst is right?

2. China continues to grow
The economy has been growing at an annualized clip of 10% in recent years. The yuan is appreciating against the U.S. dollar. Those are favorable trends for stateside investors buying into China.

It is more than likely that this year, China will lap the United States to become the country with the most Internet users. Why not? China's population is roughly four times greater than ours. Sure, it doesn't mean that the average Web user in China generates as much in ad revenue or spending as we do for leisure here in the U.S., but that is why Baidu.com (Nasdaq: BIDU  ) -- by far China's leading search engine -- is trading at a tiny fraction of the market cap commanded by the search engine rock stars closer to home.

3. China will be more important by year's end
Between the Olympics in Beijing this summer and the economy expected to grow at a much healthier rate than the iffy domestic economy, is there any reason to believe that China will be worth less a year from now?

Maybe mainland traders have foolishly bid up prices on some of the country's illiquid securities, but those aren't typically the kind of stocks that we have an opportunity to buy here on the stateside exchanges. As you can tell by pricing some of the companies, the valuations are reasonable and sometimes downright cheap.

I don't know when the market will bottom. I do know that as long as the China growth story remains intact -- and it has, for the most part -- many of the stocks that have been slammed will eventually follow their fundamentals higher.

Have the past few volatile weeks been pretty? No. Then again, sometimes ugly things can be the catalyst for beautiful buying opportunities.


Read/Post Comments (0) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 558375, ~/Articles/ArticleHandler.aspx, 11/23/2014 2:22:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement