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4 Chinese Stocks to Buy in 2008

December 18, 2007

The kid gloves are off in China. The story behind the juiced-up economy is still sound, but investors are getting picky about the China-based stocks they're snapping up.

The timing of the apathy could be a little better. Folks are bailing on China just as the Olympic Games are gearing up to move in over the summer, shining a spotlight on the country's progress in recent years.

In other words, if you fancy yourself an opportunist, now's a great time to explore potential buys in China's lulled market. I'm going to explore my favorite growth stock picks, though you're clearly invited to play at home if larger banking, real estate, and insurance are more to your liking.

Baidu.com (Nasdaq: BIDU)
Look! Up in the sky! It's a bird. It's a plane. It's a search engine!

If Baidu needed any kind of Stateside validation, the company's depository shares were tapped to its NASDAQ-100 Index last week. It's the first Chinese company to be included in the tech stock-intensive index.

Even with the recent market weakness, shares of Baidu have nearly quadrupled over the past year. Commanding 58% of China's search queries, it's easy to see why investors are excited about Baidu's prospects when just an eighth of China's 1.3 billion citizens have consistent Web connectivity.

The story gets even better when you realize that this is a scalable model with fattening margins.

Baidu


Net Margins

2004


10.2%

2005


14.9%

2006


36.0%
Source: Capital IQ.

Margins can't grow exponentially forever, of course. Baidu is bumping up against the ceiling at this point. Net profit margins during the company's most recent quarter clocked in at 36.6%.

Then again, if this is the ceiling, it's quite the view. Baidu's numbers compare favorably to the 25.3% profit margins produced by niche darling Google (Nasdaq: GOOG) during the same three months.

Baidu is trading at 87 times next year's projected earnings. That's not cheap, but Baidu is growing fast, analysts continue to inch profit targets higher, and we're really just scratching the surface when it comes to potential upside.

Focus Media (Nasdaq: FMCN)
You know who's going to love the Olympics? Chinese advertisers that want to reach out to a global audience. Who will be even happier? Focus Media. The company has established itself as the leader in display advertising.

Whether it's a network of nearly 100,000 LCD monitors that spew ads and subsidized content in high-traffic areas or more conventional spots on billboards and elevators, it's hard to lose sight of Focus. The company is getting even bigger, taking advantage of the Chinese market's lull to acquire privately held specialists in online and real-world advertising.

Revenue and net income soared 150% and 73%, respectively, during the third quarter. In a nutshell, the ads add up for Focus Media.

Ctrip.com (Nasdaq: CTRP)
The most obvious beneficiary of this summer's games is Ctrip. The operator of China's leading travel portal has come a long way in a short time. Just two years ago, it was trying to educate its users on the merits of e-tickets. Now consumers can't get enough of the company's online portal.

Revenue and adjusted earnings grew by 55% and 68%, respectively, in its latest quarter. The really impressive nugget there is that Ctrip had guided investors to expect just a 35% advance on the top line. You have to love it when an Eastern world darling eats up a little Western world sandbagging.

NetEase.com (Nasdaq: NTES)
The online gaming market is getting pretty competitive in China. Recent IPOs like Giant Interactive (NYSE: GA) and Perfect World (Nasdaq: PWRD) are growing faster than NetEase.

In fact, NetEase's last quarter was devoid of growth. That hasn't stopped the company from sticking around as a gaming juggernaut with fat margins to match. With a jaw-dropping 46% in net profit margins this past quarter and a balance sheet flush with cash, NetEase is going to stick around, ideally long enough for its pipeline of games to get it growing again.

Unlike the first three stocks, NetEase would be cheap even on a more pedestrian exchange. Trading for less than 16 times next year's earnings, NetEase may not be holding the best cards in its niche, but it knows how to play the game. Meanwhile Ctrip, Baidu, and Focus aren't cheap, but they're quality names at the right place at the right time.

So if Chinese stocks are your interest, these may be your ticket into 2008 and beyond.

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