Top 10 Stocks to Own in China

During my coverage of Chinese stocks, I have found a fairly diverse array of investments that I feel are worth mentioning. I’ve already written about some of my reasons for investing in China. The risks of investing in China are well known; reverse mergers are surrounded by great negativity and frequently targeted by short attacks, fraud exists in China just as it does in the United States and due diligence is more difficult to perform half a world away. Companies such as Rino International (RINO) have also created doubts in the minds of investors and market makers by turning out to be at best incompetent businesses and at worst deceitful fraud schemes. The practice of coverage shorting (shorting a stock, then releasing “research”) is very lucrative for the author that can materially alter the price of a stock through a negative report.

However, if an investor has the gumption to withstand the ups and downs these stocks go through, they stand to make a lot of money. Here are my top 10 stocks to own in China:

China MediaExpress Holdings Inc. (CCME) – This stock has taken as much of a beating as any in the Chinese market, and is one of the most ferociously debated stock picks on Seeking Alpha. I’ve received emails and read comments that attack the very core of my being for recommending this stock for purchase and also received more complimentary notes for my coverage. You can read about what I think of the stock here and here. My conclusion is that this is the perfect type of stock for short hits, and is significantly undervalued right now. I give CCME a price floor of $30 and a ceiling of $45.

Universal Travel Group (UTA) – UTA is another favorite of commenters and shorts, and has come under attack on several instances. I like the stock because I feel people are anticipating a faster than reasonable transition to online travel booking for the Chinese people. UTA is priced right now as though everyone in the mainland orders travel online, when the number is actually far less than that. I covered UTA in my plays on China travel here and I still feel confident giving UTA a floor of $6 and ceiling of $20.

Ctrip.com International, Ltd. (ADR) (CTRP) – Ctrip.com has taken a beating recently on what I believe to be concerns about energy costs. I believe these are mostly overblown, and the stock stands to make a nice recovery over the longer term. Ctrip.com is the leading online provider of travel services in China. Although most travel arrangements are made offline, the percentage of travel expected to be booked online will approach 30% in a few years. This investment is a diversification play on the entire consumer market when coupled with an investment in UTA. I think the two are both positioned to benefit from the increase in Chinese travelers much more than companies like eLong (LONG). I have assigned a price floor of $50 and a ceiling of $95 for this online travel giant.

Baidu (BIDU) – Baidu is one of my favorite internet stocks. I began coverage of Baidu last year around August, and enjoyed watching the stock climb higher and higher. The landscape of Chinese internet is constantly changing, as I noted here, but the leader of search and value adding services remains Baidu. I still feel comfortable with a price floor of $145 and ceiling of $255.

Yongye International (YONG) – If you want to read hilarious comment battles, then just look up an article that covers this company and you will be entertained for hours. I have never seen such animated debate. The basic premise of this company is that they have created a proprietary fertilizer blend based on fulvic acid. The name of this blend is Shengmingsu, or “life essential.” Their ascent has been swift and the doubters are many, but I believe this is simply the case of a good product being marketed effectively in a humongous market. Feel free to read my coverage here, or check out Kurt Shrout’s article here. My floor for this stock is $9 with a ceiling of $28.

Sina Corp. (SINA) – I covered Sina pre earnings last week, and anticipated a beat. Sina did beat estimates, but some soft guidance and losses from a n impairment instigated a sell off that quickly cured itself. On the good side of the news, their Twitter clone service doubled users from only four months ago to 100 million, more than analysts anticipated. Right now, you can get in right around fair value with a nice cushion of upside. I’ve assigned a price floor of $80 and a ceiling of $125 to this social giant.

Sohu.com Inc. (SOHU) – Sohu.com/Soguo.com is a presence in Chinese internet that provides gaming, information, search and more in a well accepted package. They’re a diversification play in addition to Baidu, and have healthy margins with over $600 million in revenues. I believe right now they are slightly undervalued as a result of the market focusing primarily on Baidu. Their relative valuation of around 22x earnings might also be easier to stomach than Baidu’s admittedly high PE. However, with that comes a smaller upside in my opinion than BIDU. For SOHU I’ve assigned a price floor of $75 and a ceiling of $95.

Perfect World (PWRD) – This is a gaming play on the Chinese market in general. I believe PWRD has been beaten down below a reasonable price because of negative sentiment surrounding their latest gaming offerings. However, in their recent earnings release it was revealed that they may have finally found diversification in their gaming offerings; . Also, their forward PE is about 5x future, earnings, which is very cheap for a stock in this industry. Combine this with the fact they are laden with cash at almost $5 a share and you have an attractive investment opportunity. I think PWRD has a floor of $14 with a ceiling of $26. Be on the lookout for earnings released March 7th, 2011.

Shanda Interactive Entertainment (SNDA) – This entertainment company has a gaming twist with their subsidiary Shanda Games (GAME). I believe this part of their portfolio, which has yet to be listed on the mainland because of rules surrounding subsidiaries incorporated outside of China, offers substantial upside for Shanda overall. Shanda Interactive is also more undervalued than GAME at this point in time. As a partial play on the Chinese consumer and on gaming in general, Shanda Interactive offers a solid investment opportunity. I’ve assigned a price floor of $40 and a ceiling of $55 to SNDA.

China Northeast Petroleum Holdings Ltd. (NEP) – This is a longer term play for the patient investor. I believe that because of missteps in the past, the market is anticipating pure incompetence from NEP’s management moving forward. I am more optimistic, as their strategies are already showing more reason than before. This article takes a look at their recent acquisition of Shengyuan in more detail than I will here and offers insight into a timeline for return. I believe those that take the chance on NEP early in this revenue cycle will be rewarded handsomely in the end. I give a long term price floor of $9 and a ceiling of $18 for NEP.

Conclusions

Some of these stocks are riskier than others, but taken as a group I believe they represent a nice variety of investments in the Chinese market. Although the list is internet heavy, that is a part of China that I believe will provide a good investment story in the medium term. Remember when investing in stocks like these you must accept a higher level of risk than United States stocks. Do your due diligence and make sure you have the right time horizons and risk profile when investing in these stocks. If you are concerned, you should contact your investment professional before making any decisions. Thanks for reading, and enjoy the ride!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.