The Best and Worst Stocks in China

The SSE Composite Index, Shanghai's stock exchange and one of the world's largest, finished last week up 3.2% to close at 3,157.96.

Manufacturing news helped fuel the rally. Growth in the sector accelerated during March, Bloomberg reports, and overall economic growth rose to 10.7% during the fourth quarter. That's the fastest pace since 2007, aided by a massive stimulus package.

China's weak currency, the RMB, is also aiding growth. "Without the jobs that export manufacturing creates, China would likely have hundreds of millions of people unemployed and wandering around in cities -- a recipe for social unrest," wrote Foolish colleague and Motley Fool Global Gains co-advisor Tim Hanson recently.

"I believe the Chinese government has made avoiding that situation its No. 1 priority ... Thus, the country is more than willing to keep a weak currency in order to preserve jobs."

The biggest pops and drops
Here's a closer look at the best- and worst-performing Chinese stocks of the past week, each of which trades on a major American exchange and is worth at least $150 million in market value. Returns are calculated from the March 26 close.

Last week's winners:

Company

Percentage Gain

CAPS Stars
(out of 5)

JA Solar Holdings (Nasdaq: JASO  )

18.1%

****

Solarfun Power (Nasdaq: SOLF  )

14.9%

***

ReneSola (NYSE: SOL  )

14.5%

*****

Semiconductor Manufacturing

14.4%

***

Yanzhou Coal Mining (NYSE: YZC  )

12.3%

***

Sources: Capital IQ, Motley Fool CAPS, Yahoo! Finance.

Last week's losers:

Company

Percentage Loss

CAPS Stars
(out of 5)

A-Power Energy Generation (Nasdaq: APWR  )

(14.1%)

****

Telestone Technologies (Nasdaq: TSTC  )

(13.8%)

***

China Agritech

(13.4%)

***

RINO International (Nasdaq: RINO  )

(10.7%)

***

Chemspec International

(9.07%)

****

Sources: Capital IQ, Motley Fool CAPS, Yahoo! Finance.

A weekly tour of China
The week's top Chinese stock, JA Solar Holdings, benefited from what seems to be general-market bullishness for solar. Three of the country's top performers from last week harness the sun's power to produce returns.

But pessimism has tortured JA Solar's share price for months, resulting in below-market returns year to date. Why? Skeptics will tell you that the company has a mixed history when it comes to producing profits and no history of producing free cash flow.

And yet the company is showing improvement. "Put plainly, the Chinese cell maker is eating higher-cost Western solar players' lunch," wrote my Foolish colleague and solar expert Toby Shute in February.

JA Solar shipments rose 30% sequentially during the fourth quarter. Gross margin exceeded 20% over the same period. Cash from operations also improved to $71 million, up from $42.3 million during Q3.

Some Fools expected this. In November, when orders were exceeding capacity by orders of magnitude, I named JA Solar as one of my top penny stock picks. Pricing had hit "the sweet spot," executives were saying, and they've been proven right since.

On the downside, A-Power Generation reported ... blowout earnings. Quarterly per-share profit more than doubled to $0.61 per share, far above the $0.41 per share that analysts were expecting.

But don't let that one-quarter performance small-f fool you. A-Power has suffered sharply declining returns on capital since 2006 and high revenue growth has failed to produce consistent cash from operations. More dilutive capital-raising efforts could be needed to fund expansion.

Actually, that's understating it. Dilution has been a huge problem for A-Power investors for years. Going by balance sheet data, the company's share count has tripled since 2006. Revenue has more than tripled over the same period, but net income has lagged. Management's bets have yet to pay off.

Even so, I'm unwilling to short A-Power at these levels because because Chinese stocks are notoriously volatile. This week's big loser could be next week's big winner.

JA Solar, meanwhile, is priced at 12.5 times this year's projected earnings, which I believe is more than fair for a speculative growth play. I'm going long the stock in my Motley Fool CAPS portfolio.

What do you have to say about these companies? Other Chinese stocks? Log into CAPS today and let your voice be heard. You can also weigh in using the comments box below.

For more coverage of China and the region's best stock ideas, accept a 30-day guest pass to Motley Fool Global Gains. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is also a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is as sweet and smooth as Shanghai's Last Gentleman.


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