China's Bubble-icious IPOs

It's off to the races for investors in Chinese IPOs! China State Construction Engineering (CSCE) came to market in Shanghai on Wednesday -- and showed a 56% first day gain -- rather impressive for the largest IPO globally since Visa (NYSE: V  ) went public last year. Demand for the shares wasn't lacking -- the retail portion of the offering was nearly 50 times oversubscribed! But that performance pales compared to Sichuan Expressway, which floated on Monday, registering a stunning 203% first-day gain.

It's contagious
The fever has spread to Hong Kong, where BBMG, Beijing's largest cement supplier, gained 56% on its Wednesday debut -- retail demand for shares exceeded supply by 775 times.

Chinese authorities ended a 10-month ban on IPOs in June, encouraged by strong market performance (the SSE Composite Index is up over 80% year-to-date).

What about Chinese stocks that are available to U.S. investors?
To answer that, I put together my own market-weighted index made up of the 43 Chinese companies traded on major U.S. exchanges with a current market value greater than $500 million. These are the results in terms of returns and valuation:

 

Year-to-Date Total Return

Quarter-to-Date Total Return

Price-to-Book Value

Baidu (Nasdaq: BIDU  )

169%

17%

22.00

Yingli Green Energy (NYSE: YGE  )

129%

3%

2.78

Suntech Power (NYSE: STP  )

65%

8%

2.46

JA Solar (Nasdaq: JASO  )

14%

6%

1.23

Focus Media (Nasdaq: FMCN  )

(7%)

5%

0.94

LDK Solar (NYSE: LDK  )

(15%)

(1%)

1.66

Market-Weighted Average (43 stocks)

45.7%

10.3%

3.43

S&P 500

7.5%

10.9%

2.06*

Source: Author's calculations, based on data from Capital IQ, a division of Standard & Poor's. Returns and price-to-book multiples are as of July 30, 2009.*Approximate value (price-to-book value multiple of the SPDR S&P 500 ETF (SPY)).

Bigger gains, more expensive
It's clear that U.S.-traded Chinese stocks have far outpaced U.S. stocks, even during the recent mini-rally. Furthermore, they're quite a bit more expensive on a price-to-book value basis as well. Ah, but Chinese companies promise untold growth, bulls will counter. Perhaps, but the other side of the coin is this: This set of companies -- let alone any one specific name -- also present higher risk than the S&P 500; investors need to account for that in valuations, also.

U.S. investors need to be wary, too
Why this bubble in China? Wei Jianing, an economist at the Development Research Center of the State Council, estimates that 20% of the unprecedented amount of credit banks have extended during the first half of the year has found its way into the stock market. For the BBMG IPO, Hang Seng Bank offered margin loans at a record low rate of 0.5%.

Once Chinese authorities move to cool the market, it could have a very nasty effect on stock prices. It is perhaps ominous that CSCE's strong debut didn't prevent the Shanghai market from falling 5% on Wednesday -- its largest decline of the year. Investors in Chinese stocks -- here and in China -- need to be wary.

Global Gains co-advisor Tim Hanson won't overpay for growth, but he explains why he'll make money in China.

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Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Baidu, Focus Media Holding, and Suntech Power Holdings are Motley Fool Rule Breakers selections. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (23)

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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.

  • Report this Comment On July 31, 2009, at 5:19 PM, lwetter wrote:

    Granted China stocks that seem available for Americans to invest in are limited. I actually held my breath and blunged into BIDU last week. Glory be I floated with over $16.00 in a few days. In this market that says something. Thing was I started to drown in the BIDU bubble. SNP was and has been gaining bit by bit. So because traders like me seem focused on the BIDU bubble we forget that one stock does not make the whole China stock market. The ETF was up. CAT an American stock focused in China is up. I say spread out the portfolio into different international markets to measure China's growth. Oh I am going to give BIDU a BID U if it keeps crashing by the middle of next week.

  • Report this Comment On August 01, 2009, at 10:42 AM, bucheron wrote:

    It's like any other bubble, it will burst one day, very dangerous stocks.

  • Report this Comment On August 01, 2009, at 10:54 AM, plange01 wrote:

    china's markets are like a runaway train waiting to crash.brings back memorys of russia a few years back...

  • Report this Comment On August 02, 2009, at 2:16 PM, streetflame wrote:

    China Finance (CHFI.OB) is the main company I would think would benefit from the lifting of the IPO moratorium. They help small caps go public and list on US exchanges. And yet the news did not move them. JRJC and others will be secondary beneficiaries and have seemed to respond more strongly.

    In the case of CSCE, Sichuan Expressway, and BBMG, it is obviously not sustainable for IPOs to trade at so much higher valuation than the rest of the market. The strange thing about the Chinese market is that there are still lots of cheap stocks - perhaps because of the people's relative inexperience with investment, speculation seems to be more concentrated than in developed markets. Hopefully this will help mitigate a coming meltdown. In fact, maybe IPO fever is just pent-up demand which will drop off naturally, not indicative of a huge blow-off top coming.

  • Report this Comment On August 02, 2009, at 10:33 PM, exseries7 wrote:

    This recent bubble was caused by China's stimulus spending - much of which went directly into stock and real estate markets - not by any substantive change in China's economics. Exports are still down and the much anticipated rise in consumer spending did not happen. My friends in China discount the government's promise of universal health care and continue saving thier money for catastrophic medical bills, in addition to school and retirement needs. They still spend very frugally.

    Even if the world economy does improve to the extent that exports were to resume their rapid rise, how many factories can be built without further polluting the already toxic atsmophere, and how many chemicals can you dump into rivers withut further contaminating water? China needs to be careful about both econmic and environmental implosions. Add to that the additional civil unrest it fears will happen if jobs are not created, and you will see a country walking a tightrope.

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