Today is either an incredible buying opportunity or the stock market's equivalent of Dante's Ninth Circle of Hell. It just depends on how you look at it.
For the owners and executives of small Chinese companies, it sure feels a lot like the latter. At least, that was the gist of a recent presentation by a prominent investor relations expert Crocker Coulson. At a recent investment conference attended by some of the China's most promising small public companies, Mr. Coulson gathered all of the executives in one room and pointed out the elephant during his presentation entitled "Small Cap China Hell: How We Got Here and How We Can Get Out."
Mr. Coulson's data was downright sobering. Valuations of these once-hot and still fast-growing Chinese firms are, in Mr. Coulson's words, "completely washed out." Take a look at the average performance and valuation metrics for the companies that presented at the recent Roth Capital conference in California:
| Metric |
Mean |
Median |
|---|---|---|
|
52-week price change |
(67.8%) |
(66.8%) |
|
P/E |
6.4 |
5.2 |
|
P/B |
1.2 |
0.9 |
|
EV/EBITDA |
5.1 |
3.2 |
Data courtesy of CCG Investor Relations.
Yes, that's bad
Now let's compare those numbers with those of the large-cap Chinese companies such as China Mobile
| Metric |
Mean |
Median |
|---|---|---|
|
52-week price change |
(46.6%) |
(50.1%) |
|
P/E |
11.4 |
8.9 |
|
P/B |
1.8 |
1.2 |
|
EV/EBITDA |
6.1 |
4.8 |
Data courtesy of Capital IQ.
And finally against the Dow 30, the popular U.S. stock average that includes the likes of Boeing
| Metric |
Mean |
Median |
|---|---|---|
|
52-week price change |
(42.4%) |
(38.1%) |
|
P/E |
11.3 |
10.0 |
|
P/B |
2.4 |
1.9 |
|
EV/EBITDA |
6.6 |
5.6 |
Data courtesy of Capital IQ; negative earnings excluded.
As you can see
Though stocks are down across the board, there's been a clear flight to quality, with unknown Chinese small caps being pounded harder than their larger Chinese peers, and much harder than their larger U.S. counterparts -- despite the much more compelling growth outlooks for these small Chinese names. According to Mr. Coulson, this is a consequence of poor communication with investors, a lack of transparency, and a deep suspicion among Western investors who have gotten burned by Chinese companies of questionable quality.
Yet all is not lost. Though the market has painted Chinese small caps with a broad brush, there are a few quality names trading for extraordinarily low multiples. In fact, I profiled a few of those cheap stocks not too long ago. According to Mr. Coulson, discerning investors who choose carefully in the small-cap China universe will earn five to 10 times their money over the next three years. At the same time, however, Mr. Coulson expects 25% to 30% of publicly listed Chinese small caps to either go private or go bankrupt.
Big winners and big losers
That's a stark risk/reward profile, yet there is clear opportunity in buying shares of a company growing 25% or more annually for just five times earnings. If that opportunity intrigues you, or you'd like to learn more about how to invest in some oversold Chinese names, click here to join our Motley Fool Global Gains service free for 30 days.
But be careful out there. It's getting dicey in the world's emerging markets, and improved investor relations practices may not be enough to turn it around in the near term.
