An Asian Specialist's Top Chinese Stocks

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Guinness Atkinson Funds are known for their specialization in Asia. Although many investors are concerned about China, this fund family thinks uncertainty and fear have led to cheap valuations in this increasingly important nation. Thus, Guinness Atkinson is “bullish on China.”

Underpinning this position are several factors. First, although economic growth has begun to slow, it is still much higher than the growth rates possible in most other countries around the world. This is particularly true when comparing growth in China to growth in developed nations like the United States (which is actually one of the healthiest developed economies today). Additionally, in a world mired in debt, China has plenty of cash that it is has been using to support its economy.

Looking at the top holdings of the Asia Pacific Dividend Fund (GAADX) led me to examine these three companies: China Mobile (NYSE: CHL), PetroChina (NYSE: PTR), and Taiwan Semiconductor (NYSE: TSM).

China Mobile
China Mobile is a provider of cellular phone service in China and Hong Kong. It is among the largest cell providers in the world, giving it a large base of users and an annuity like revenue stream. The big opportunity right now is the shift from voice to data, which brings with it higher fees and, usually, increased usage. No doubt, China Mobile will be a long-term beneficiary of this shift.

However, the company is, basically, state owned. So the government of China has a material influence on the company's business. This has likely led to China Mobile's use of technology that isn't an industry standard in the world. That has been a competitive disadvantage of late and has likely helped to hinder its customers' shift to digital usage. This type of decision is why some investors avoid companies in which countries hold controlling positions.

For more aggressive investors, however, it is hard to argue with the scale of China Mobile's customer base and the potential that holds for increased data usage over time. A massive cash hoard further sweetens the pot. The stock's near 3.5% yield may be low compared to cell providers in the United States, but Verizon and AT&T don't appear to have as strong long-term growth prospects as China Mobile, despite the Chinese government's role in the company.

PetroChina is a major integrated oil company. Although its business is centered on China, its reach is much further than that, as it looks to secure energy resources for its home market. Operationally and financially, the company is roughly similar to most other major oil companies. This similarity ends, however, when you look at the company's ownership. Like China Mobile, PetroChina is basically controlled by the Chinese government. This has led to a few setbacks (taxation issues) that a public company might have aggressively lobbied against that PetroChina had little option but to accept quietly.

Still, the outlook for PetroChina hinges on the growth of the Chinese market. As the economy matures, the demand for energy is likely to continue increasing. Demand for oil, in particular, will increase as more and more consumers enter the “middle class” and buy themselves cars. So long as China continues to grow and mature, PetroChina's outlook will be positive. It will go through ups and downs based on oil pricing, like any other oil company, but the long-term trend should remain intact. One other factor to note is that the company appears to be well positioned in natural gas should China decide to shift its focus from oil to its cleaner burning cousin.

With a yield in the 3.4% range, PetroChina isn't the highest yielding oil major around. However, the yield is on par with the industry leaders and backed by the continued growth of the company's home market.

Taiwan Semiconductor
Taiwan Semiconductor isn't a direct investment in a Chinese company, as its name should imply. However, Taiwan and China are, pretty much, joined at the hip (regardless of the desirability of that connection). Moreover, China is a major market for Taiwan Semiconductor's products, so growth in China is a positive thing for Taiwan Semiconductor.

The company is one of the largest chip makers in the world. It doesn't design chips; it makes what other people ask it to. This is a commodity business, but one in which Taiwan Semiconductor is the 800-pound gorilla. This scale advantage and a huge cash balance should give it the ability to maintain its leadership position. That said, the chip business is cyclical, so there is some risk to shareholders in that.

In fact, right now might be a good time to do nothing. The company recently reported decent earnings, but warned of softer results going forward. Thus, patient investors might be able to time their entry into this major industry participant so that they earn more than the recent 2.4% dividend.


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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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