A growing chorus of investors has started to talk of a China
bubble. These folks think the Chinese government will be unable to
glide theeconomy onto a slower plane of growth without unexpected
stumbles. And they expect Chinese stocks to move sharply lower if
this rising giant loses its economic footing. Yet many others
remain quite bullish, anticipating continued sustained growth for
the hottesteconomy thus far in the 21st century. Who's right? Who
knows?
Since it's hard to know how events will play out in 2011 in China,
it's important to stay invested in this dynamic
economy
, but perhaps with a more defensive posture. Here are three
companies that should flourish in 2011, regardless of the how the
broader Chinese economy -- and stocks -- fare in 2011.
Tri-Tech Holding (Nasdaq: TRIT)
China's got a problem: its waterways are very polluted and many
municipalities appear ill-equipped to assure citizens that their
tap water is safe to drink. To clean up water supplies, they're
increasingly turning to Tri-Tech for large scale remediation
efforts. Tri-Tech offers aone-stop shop of hardware, software and
services to clean and monitor water systems. It's not just a
government business: Many large companies in China are being tasked
to clean up their act, though they lack the skills to do so
themselves.
Though the company only cracked the $10 million revenue mark in
2009, sales are now skyrocketing: They'll likely exceeded $40
million in 2010 and could hit $75 million in 2011. Wednesday
morning, management provided a comprehensive update regarding the
many projects it is involved with, and also laid out a case for
much higher levels of business activity.
That sentshares surging higher, past the $13 mark, but I see a move
toward $20 during the course of this year. Why so bullish? Because
this is a very profitable business andshares are quite cheap on a
price-to-earnings (
P/E
) basis. Per share profits likely approached $1 in 2010, but could
exceed $1.50 in 2011. The company's growingbacklog implies that
sales and profits will keep growing at a rapid clip in subsequent
years as well. Even ifshares trade for just 13 times projected 2011
profits, then the stock would move up to that $20 target.
China MediaExpress (Nasdaq: CCME)
Everywhere you turn in China, you see advertisements. Various firms
have carved out niches in various forms of ads. China MediaExpress
is one of the leading providers of ads on buses. More than 25,000
buses operate around the country carrying ads placed by CCME on
behalf of its clients. The company is now branching out into many
second-tier cities, so that figure could surpass 35,000 in a few
years.
Yet China MediaExpress found itself with an unusual problem. The
company had built an impressive roster of clients (70% of which are
ad agencies and 30% of which are direct advertisers), but the bus
market has obvious limits. So the company has decided to take its
considerablecash flow from that business and re-invest in a broader
advertising platform. The goal: to steer the hundreds of thousands
of passengers that ride its buses every day to a company-operated
web portal. China MediaExpress' clients can run ads on its site
(along with a soon-to-be-launched magazine) and customers can place
orders in response to those ads.
China MediaExpress isn't aiming to become the next
Amazon.com (Nasdaq: AMZN)
. Instead, it simply wants to get a healthy salescommission for
every order placed, and let clients actually worry about order
fulfillment. Although the company will need to spend money to build
out the site in 2011, possibly creating a drag on profits, it
should enable sales and profits to move nicely higher in 2012 and
beyond.
Even before that foray, this is a cheap stock:
shares
trade for just seven times likely 2010 profits. That multiple moves
closer to five when you back out the company's hefty $170 million
cash balance. Shares, which currently trade for about $17, could
move up into the mid $20s or higher if the company's Internet
initiatives start to pay off. Judging by the existing bus business
alone, shares seem to be worth at least $20. Depending on how
things play out, this stock has moderate to significant upside.
Deer Consumer Products (Nasdaq: DEER)
I've written about this company several times before, and I'll keep
doing so while it remains sharply undervalued. Deer makes kitchen
appliances for global firms such as
Stanley Black & Decker (
SWK
)
and sells into the Chinese market under its own name. In the past
year, management has delivered the goods by serially raising sales
andprofit forecasts, buying back stock and inking new customer
relationships. Sales, which grew an explosive 85% in 2009, likely
more than doubled in 2010. A new plant to be opened in Eastern
China in 2011 should propel growth higher.
Management predicts sales growth of at least 30% in 2011, and
profits should grow even faster than that. Meanwhile, shares trade
for just 10 times next year's projected profits. While they remain
so cheap, management is using the company's prodigiouscash flow to
buy back stock. This stock remained out of the spotlight in 2010,
but it's becoming too large to ignore, with annual sales pushing
past the $200 million mark. As it finally moves onto more
investors' radars in 2011, I see an upward move from a current $11
into the mid to upper teens.
Action to Take -->
2011 may or may not be a great year for the Chinese economy and
stock market. But these companies are building powerful long-term
business models, and the far-sighted investor is likely toprofit
from these stable, cash-rich plays.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.