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.





Xinyuan Real Estate (NYSE: XIN  )





ChinaEdu (Nasdaq: CEDU  )





China Nepstar Chain Drug (NYSE: NPD  )





Giant Interactive (NYSE: GA  )





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 (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.

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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