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 stateside IPOs.

It's not pretty. Take a look.

Source: IPO Home and Yahoo! Finance.

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 one of the country's fastest-growing online games. 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 IPOs have become. Xinhua Finance Media (NASDAQ:XFML) and Noah Education (NYSE:NED) have gone public over the past couple of years, only to find their shares trading today for less than half their IPO prices.

We won't call today the bottom. We haven't earned that right. However, we do have some words of encouragement for anyone who still has an oar in the Chinese investing waters.

1. The sell-off 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 only around 12 times forward earnings and is looking to post a 22% increase in earnings growth this year. Giant Interactive's 2008 P/E is just around 8.

Xinhua Finance Media is actually trading for less than 3 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 talking about only four analysts following the downtrodden stock. However, what if they are right?  

2. China continues to grow
The economy has been growing at an annualized clip of 10% in recent years. The yuan is undervalued against the U.S. dollar. Those are favorable trends for stateside investors buying into China.

It's possible that China will pass the United States this year 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 Baidu.com (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
The economy is 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.

We don't know when the market will bottom. We 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.

Our Motley Fool Rule Breakers team will soon visit Silicon Valley. To find out about businesses with growth rates similar to these Chinese companies, you can sign up now, free, to receive dispatches from The Motley Fool Innovation Tour.