10 Chinese Companies Poised for Growth

For everyone who doubted China's ability to thrive in a global recession, the world's third-largest economy has done the improbable. Thanks to a massive stimulus, China reported domestic growth of 7.9% for the second quarter, up from 6.1% in the first quarter, which was one of its most dismal showings in the past 10 years. Some economists say second-quarter gross domestic product numbers could be in the neighborhood of 15% when calculated on a quarter-over-quarter basis. (The Chinese government only reports year-over-year estimates.)

China is on track to record 8% GDP growth for the full year, even if the pace of growth slows in the second half. The country's growth has been fueled by increases in factory output, bank lending, and commodity imports. China's housing sector is coming to life, which would bode well for builders and commodity stocks. House prices have climbed 10% this year.

China's stock market certainly got the cue, with Shanghai's index up 75% year to date.

The looming question: Is this recovery sustainable without help from the U.S. and Europe (because China is still largely an export economy)? Probably not. However, the Chinese government has struck a serious chord about jump-starting its economy, which means that China most likely will continue to spend money on internal projects until the traditional forces that have spurred economic growth in years past -- exports to Europe and the U.S. -- kick back in.

But more importantly, the long-term story still remains positive. China is still on the road to industrialization, with many years to go. This all means a big boost for China, and a big boost for investors properly positioned to cash in on China's efforts.

With that in mind, I set out to find companies most likely to benefit from China's latest stimulus infusion, as well as the longer-term infrastructure buildout and industrialization. I ran four screens using The Motley Fool's CAPS screening tool. I searched for companies in basic materials, real estate and industrials, with CAPS ratings of four and five stars -- the two highest ratings from the CAPS community. Companies also had to have a minimum market cap of $200 million.             

Following that, I picked out companies based there that provide materials or services that could be used in China's transformation.

Here are the combined results:

All said, there are always risks for any investment thesis. China's eye-popping growth was made possible because banks have issued two times the amount of loans compared with last year and the government has tripled the money supply, which could form a foundation for an economic bubble. What's more, the economic recovery has been scattered and the Chinese economy is grappling with deflation and excess capacity.

The key is creating sustained growth internally, as opposed to relying on foreign consumers. The good news is that this very idea is beginning to gain traction. The vice premier said this month that the government plans to introduce policies that should lead to internal growth.

These companies are a good starting place for investment research -- but that's all they are. You'll need to dig deeper into the businesses to see not just how much exposure these companies have to the government's stimulus, but whether they really are good companies to own for the long term. Remain mindful of the company's fundamentals and growth prospects. Be careful about valuations and overexuberance, given the run many have had. Pay attention to what fundamentals are baked into equity prices, because that's where value or value traps can emerge.

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For related Foolishness:

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