If I Have to Buy 1 China Stock in 2009

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I can't be the only one waiting for 2009 to begin to give my portfolio a new chance to shine. One market that should bounce back nicely when the equity markets recover is China. Its stocks have been pummeled, even though the economy of the world's most populous nation is holding up substantially better than the rest of the world.

I took a look last week at the one search engine I would like to own heading into the Year of the Ox. This time I'm going to take a look at China, with an emphasis on the online stocks that I cover. China's leading Internet plays offer attractive valuations and typically more promising growth prospects than their stateside peers.

China gets wired
Just because I'm going to single out my top dot-com picks in China doesn't mean that the rest of the sectors don't offer compelling opportunities. There are certainly some compelling arguments to buy into advertisers, insurers, and infrastructure plays.

However, China's migration into cyberspace is early enough in its growth cycle to blow you away. China's audience of Internet users topped the United States' to take top honors over the summer, and we're still talking about only roughly one-fifth of the country being online at the moment.

The runners-up are ...
There are plenty of worthy stock candidates here. We should definitely start with (Nasdaq: BIDU  ) . China's leading search engine has been hammered in recent weeks, after being grilled for accepting ads from unlicensed medical sponsors. Baidu didn't help foster confidence when it conceded that the seemingly small niche actually makes up a whopping 10% to 15% of its total revenue.

Baidu commands roughly two-thirds of the country's search queries, so it had little choice but to clean up its act. It booted the errant sponsors, and the next few quarters will be critical in determining the incident's financial impact in both advertiser spending and visitor usage.

The black eye is enough to keep Baidu out of gold medal contention, but it doesn't mean that Baidu won't be a huge winner. The stock is now trading at just 19 times next year's projected profitability. That's not too shabby for a stock that is expected to grow earnings by 91% this year and 37% in 2009.

Another runner-up that has stumbled lately is (Nasdaq: CTRP  ) . China's leading online travel portal has taken a hit since hosing down its near-term guidance last month. But travel within China for its economically improving citizenry still seems like a no-brainer over the long haul.

China Finance Online (Nasdaq: JRJC  ) is another potential scorcher. The company runs premium and free ad-supported stock market research websites. The company was growing nicely even when Chinese equities first began to tank, as individual investors clamored for a well-researched edge. However, it, too, is feeling the pain lately. Thankfully, the company is deliciously profitable, growing, and trades at just twice the cash on its balance sheet.

There are other ways to play the dot-com boom. Telco heavies like China Netcom (NYSE: CN  ) and China Telecom (NYSE: CHA  ) are thriving in connecting the masses to the Web. I have also been a huge fan of the online gaming revolution for years. Some of the earliest Motley Fool Rule Breakers recommendations were the leaders in serving up addictive multiplayer role-playing fantasy games where millions play simultaneously.

And the winner is:
The best bang for your buck -- or yuan -- at the moment has to be (Nasdaq: SOHU  ) . It is a fast-growing play in both search (with its Sogou engine) and online gaming (with the popularity of its Tian Long Ba Bu game).

It is on the multiplayer gaming front where Sohu has been a rocket lately, helping revenue and earnings soar 134% and 316%, respectively, in its latest quarter. Unlike other dot-com bellwethers like Baidu and SINA (Nasdaq: SINA  ) , analysts have actually been raising Sohu's profit targets over the past three months.

Wall Street now sees Sohu earning $3.77 a share this year, and $4.53 in 2009. It's hard to pass on Sohu these days while it's trading at 10 times next year's projected net income.

Whether Sohu or one of the many runners-up catches your eye, now is the time to position yourself for the eventual Chinese stock market recovery.

Searching for more? Check out these headlines: International is a Motley Fool Hidden Gems recommendation. China Finance Online and are Motley Fool Rule Breakers picks. SINA is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz is a huge fan of China's growth stocks and has recommended several as newsletter picks. He does not own shares in any of the stocks in this story. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (95)

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  • Report this Comment On December 08, 2008, at 5:06 PM, prphil wrote:

    Very interesting article, BUT : 1. this recession we are in is world wide. We haven't seen bottom until we see a copitulation day. That will test the S&P 500 index. 2. The % of folks that think SCHU will go up is impressive. Bet you'll have a better chance to buy, but you'll have to be ninble on the timing end. China is notorious for conplusive gamblers. Great pick -- later.

    3. The rest of the emerging markets will not do nearly as well as China may do, especailly in the near future. I'm sure the rest of SE Asia uses SCHU too.

    Thanks for the good article

  • Report this Comment On December 08, 2008, at 5:25 PM, prphil wrote:

    Try SOHU -- it will work better in your quoter.

  • Report this Comment On December 10, 2008, at 9:00 PM, chinarussiaindia wrote:

    china, india, russia are all big growth market but they all depend on export consumption of developed countries like usa, japan, europe. usa is bankrupt without borrowing money, europe have problems, and japan have no confidence. middle east have problems now with their buying binge which depended on high oil prices which now have collapsed. china, india, russia will have capitulation just like usa will have before any recovery.

  • Report this Comment On December 12, 2008, at 6:38 PM, Scones wrote:

    SUTR will benefit immensely from the infrastructure stimulus package implemented by China. The stock has already doubled in the last few weeks and is still undervalued. There are very few publicly trade steel companies in China and this little gem is a powder keg waiting to explode. I also like GU as an undervalued play in China.

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