The Discount In Many US-Listed Chinese Stocks

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

For several years US-listed Chinese small cap stocks have underperformed the market. Despite many of them achieving growth, pay a dividend, connect with shareholders, and so on.

P/E ratios have never been so low going forward. Where do you find stocks with a P/E below 3? Yes, in the United States. The "China Discount" is not a discount anymore, but a bargain.  

For a long time I have personally invested in US-listed China stocks, so I've seen more than a few companies trade at a deep discount to companies in similar industries in the US. Of course there is always the risk that management is cooking the books. Risk that production capacity and inventory levels are grossly misstated and many other risks may be involved. Investing in emerging markets always has a certain level of risk, because corporate governance is not at the same level as in many Western countries, or even doesn't exist at all.

But even investing in good old American companies can be a risk. I don't have to explain which US companies were cooking the books.   

The "bargains" are here and can offer huge gains for investors who accept the risks and are confident that a turnaround in the China space is eminent.  

One simple rule: don't invest in China unless you can handle the risk.

So here we go four companies to consider. 

Giant Interactive Group (NYSE: GA)

Giant Interactive Group is a leading online game developer and operator in China in terms of market share, and focuses on massive multiplayer online role playing games. Currently, Giant operates multiple games, including the ZT Online 1 Series, ZT Online 2, Giant Online, XT Online, The Golden Land, Elsword, and Allods Online. The company has built a nationwide distribution network to sell prepaid game cards and game points required to play the company's games.

The online gaming market is still growing rapidly, with an average of 694,000 current users, they rake in enough money to pay a sustainable dividend. With a dividend yield 4.76% this stock is an interesting play for dividend-orientated growth investors.

Giant Interactive Group          
Market Cap 1.51B P/E 8.30 ROA 34.00% Shs Outstand 236.40M
Income 186.00M EPS (ttm) 0.77 ROE 43.39% Shs Float 230.27M
Sales 333.45M P/S 4.53 ROI 46.85% 52W Range 3.69 - 6.61
Book/sh 2.07 P/B 3.09 Gross Margin 86.43% Avg Volume 875.61K
Cash/sh 1.59     Oper. Margin 60.93% Price 6.29
        Profit Margin 60.61%    

Guanwei Recycling (NASDAQ: GPRC)

Guanwei Recycling is China's largest manufacturer of recycled low density polyethylene (LDPE). Adhering to the highest "green" standards, it has generated rapid growth producing LDPE from plastic waste procured mostly in Europe for sales to more than 300 customers (including over 150 active recurring customers) in more than ten different industries in China. The company is one of the few plastic recyclers in China that has been issued a Compliance Certificate by Umweltagentur Erftstadt, which issues certificates of approval for certain plastics manufacturers which meet strict environmental standards in Germany. This enables the company to procure high quality plastic waste directly from Germany and other European countries (Spain and Holland) with no middlemen, and permits highly economic production of the highest grades of LDPE. 

This stock has come under pressure because of some negative Sharesleuth articles. Management of the company has being FOOLED by American stock promoters. But it seems that investors think the company was wrong. At the current bankruptcy price of $1.50 you get the company almost for free, P/E even below 2. I personally think the management is getting bored of the depressed stock price and will initiate a "going private" proposal soon enough.  

Guanwei Recycling          
Market Cap 15.20M P/E 1.23 ROA 25.94% Shs Outstand 10.41M
Income 12.10M EPS (ttm) 1.19 ROE 33.04% Shs Float 8.82M
Sales 69.79M P/S 0.22 ROI 33.04% 52W Range 1.22 - 3.86
Book/sh 4.17 P/B 0.35 Gross Margin 27.48% Avg Volume 53.58K
Cash/sh 1.27     Oper. Margin 23.84% Price 1.52
        Profit Margin 17.34%    

Asian Entertainment & Resources

As mentioned in my first article on Fool, this junket gaming operator could be the next five bagger. Just leave it some time. Stock buyback and dividends will do the rest. 

For more details about this company switch to my first Foolish post.

Cleantech Solutions International (NASDAQ: CLNT)

Cleantech Solutions is a manufacturer of metal components and assemblies, primarily used in clean technology industries. The company supplies forging products, fabricated products, and machining services to a range of clean technology customers, primarily in the wind power sector and supplies dyeing and finishing equipment to the textile industry. Cleantech Solutions is committed to achieving long-term growth through ongoing technological improvement, capacity expansion, and the development of a strong customer base. 

The company has a good PR, because they inform you frequently about the signed contracts. Despite that the valuation is also depressed. With a P/E below 3, and a book value that is more than 5 times the current stock price of $4.33 you have almost a free lunch. Geoinvesting went to look around and confirmed that it is an existing business. Where due diligence is not good for!

Cleantech Solutions International          
Market Cap 11.56M P/E 2.50 ROA 5.26% Shs Outstand 2.67M
Income 4.52M EPS (ttm) 1.73 ROE 6.15% Shs Float 1.72M
Sales 53.31M P/S 0.22 ROI 6.13% 52W Range 1.65 - 8.81
Book/sh 28.65 P/B 0.15 Gross Margin 22.44% Avg Volume 266.08K
Cash/sh 0.36     Oper. Margin 12.84% Price 4.44
        Profit Margin 8.48%    

Conclusion

Four great ideas that are worthy to look at and for investors with a strong stomach I would suggest take a bite.

 


WakeUpInvestor owns all companies listed in this article. The Motley Fool recommends Giant Interactive Group. 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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