It's been a tough year for Chinese stocks that trade in the
United States. Many of them have sold off -- and stayed cheap --
even as they sport impressive growth rates and low valuations.
Thanks to a sharp drop on Friday on renewed concerns about an
overheatingeconomy , these cheap stocks have become even cheaper.
To be sure, the Chineseeconomy faces hurdles on its path to higher
. [See "
5 Landmines for Chinese Stocks in 2011
Nevertheless, even as investors stay focused on near-term
challenges, the long-term opportunities remain as robust as ever, a
message perhaps lost when you look at 52-week stock charts of many
China-based firms, a number of which are now off more than -40%
from their 52-week high.
I've pulled together a short list of beaten-down names. Let's take
a closer look at some potential rebound candidates.
China XD Plastics (Nasdaq:
China XD is the largest supplier of modified plastics to the
burgeoning Chinese automotive industry. The company had its first
full year of operations in 2007 and is on track to post more than
$200 million in sales this year -- a +65% jump from 2009. Yet China
HD has soured with investors recently after seeking to sell more
shares to raise fresh capital. Shares fell nearly -20% in early
October on that announcement and have never recovered.
Serial capital-raising has been a major negative for many Chinese
companies, as they don't understand U.S. investors' predilection
for one-and-done capital-raising. To be fair, that capital raise
has a good purpose: the company's manufacturing capacity will
increase +35% in 2011. And that should propel
earnings per share (
from an expected $0.50 this year to more than $0.80 next year,
despite the recent share dilution. Shares currently trade for less
than seven times projected 2011 profits.
The real catalyst for this stock will be management's announcement
can cover any future expansion plans. For now, shares appear to
have found a floor and should move back into favor next year as
investors once again focus on the growth dynamics of the robust
Chinese auto market.
China Security & Surveillance (NYSE:
How do you analyze a company that is winning loads of new business
but keeps reporting tepid sales? That's the conundrum faced by
investors with China Security & Surveillance, which continues
to build a massive
on the heels of new contract wins. But those contracts are
stretched out over an extended period of time, so the company has
lagged revenue forecasts for four straight quarters. Sales will
likely still grow an impressive +25% this year, but that's half the
forecasted growth rate expected earlier in the year.
The third quarter brought more of the same. Sales growth, due to
the timing of some contracts, was just +14% compared with a year
earlier, but backlog shot up from $213 million at the end of June
to more than $400 million.
As a quick recap, China Security & Surveillance is one of the
leading suppliers of security gear to companies and governments in
China. The company is benefiting from a government-mandated
"safe-city" program that seeks to deploy banks of video cameras,
traffic management systems and emergency response systems in
China's 200 largest cities.
As is the case with China XD Plastics, China Security &
Surveillance has soured investors with its serial capital raising
efforts that dilute existing shareholders. The number of shares
outstanding shot up from 53 million a year ago to a recent 88
million. That led to a recent -30% quarterly drop in
, even though
was +50% higher than a year ago. Management anticipates only modest
growth in shares outstanding next year, which should enable EPS to
move toward the $1.15 mark. Shares trade for just five times that
forecast. That multiple won't stay that low in 2011 -- if
management can refrain from diluting shares further and if it can
deliver sales results that finally meet or exceed forecasts.
Deer Consumer Products (Nasdaq:
Deer makes kitchen appliances for global brands like
Stanley Black & Decker (NYSE:
and is now ramping up domestic sales by steadily building its brand
among Chinese consumers. I've written about Deer several times
before, always noting that the company is a solid grower and nicely
profitable. Shares have risen more than +50% since I last visited
this stock in August, yet they still look cheap.
Deer announced impressive third quarter results last week,
highlighted by a +108% jump in sales and a +125% jump in net
income. Thanks to recent contract wins, Deer expects EPS to grow
more than +30% in 2011 to around $1.10 to $1.20. Shares trade for
around 10 times that view. This remains, in my view, as the best
play on the rising Chinese middle class.
Action to Take -->
China XD Plastics and China Security & Surveillance are
extremely cheap due to dilution concerns that should abate. Deer,
while not quite as cheap, still looks very undervalued in the
context of long-term growth. All three of these stocks look like
long-term winners, and should garner more investorappreciation in
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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