Chinese stocks are the clear winners for 2006, fueled by momentum from the 84% gain on Dow Jones CBN 600 index, the Chinese stock market tracking index.
Few Reasons Why I like China traded Stocks and Mutual Funds:
- China residents have over $2 trillion in the bank. That leaves profitable earnings opportunities for commercial retail, insurance, health care, etc.
- China requires the equivalent of 200 nuclear plants to meet its rapidly expanding and growing energy needs. Just so you know, only 442 nuclear plants exist world-wide.
- The Chinese stock market is highly in favor. Institutional investors, the market gurus who really determine stock market prices, are shifting large dollar amounts into Shanghai and Beijing-based companies.
- The Chinese Banking sector is seeking help from US investment firms in order to restructure their loan and credit departments.
As part of my international investing plan for 2007, Chinese stocks will represent a substantial percentage of my revamped investment portfolio.
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Here are the links to every post in Chinese Stocks to Watch in 2007 Series.
2. Home Inns & Hotels Management (HMIN)
3. Sinopec Shanghai Petrochemical Co. (SHI)
4. China Telecom Corporation (CHA)
This is an ongoing series, so check back for updates every couple of days.
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This is another excellent source of information regardingthe China stock universe in 2007. This I copied from thier January 2007 Newsletter. Excellent read but I can’t copy the charts and corresponding tables here to make it completer. For that you have to visit them at http://chinavestor.com - this is a china stock research company online.
2006 was The Year for Chinese stocks. A seemingly unquenchable investor thirst for all things Chinese helped propel the Shanghai Composite Index to a 130% gain for the year, followed closely by the Hang Seng China Enterprise Index*. Even though we explained in the previous Newsletter (December 2006 issue) that Shanghais stellar performance in 2006 is somewhat misleading because compilers of the Shanghai Composite Index include IPOs right from their debut day, giving the mainland index a regular and artificial boost, the triple digit gain is still remarkable. The interest in China spurred Hong Kong s Hang Seng Index to a 34% gain in 2006. The China Enterprise Index, which comprises major Chinese companies, or H-shares, such as PetroChina or China Life Insurance, nearly doubled in value.
Thanks to the composition of the Xinhua China 25 Index, which basically has the same components as the China Enterprise Index, U.S. investors could capture the stellar performance of the Chinese stock universe. FXI** nearly doubled its value, far outperforming the PGJ***, not to mention the Dow.
What do we expect in 2007? Will this trend continue? If so, how to get the best out of it?
First of all, investors have to realize that most of the spectacular index gains are attributed to large cap stocks. We expect to see their strong momentum to carry well into 2007. These large cap stocks make up the Hang Seng China Enterprise and the Xinhua China 25 Indexes composition and as a result, we think these will do well in 2007.
As we have previously argued, the Shanghai Composite is biased and artificially boosted the way IPOs are calculated into the index performance. With a strong IPO pipeline, Shanghai is expected to perform well in 2007 though not as spectacular as in 2006. Mega IPOs like ICBCs $20 billion plus are unlikely to occur as the banking sector went public by 2006.
If history can predict future, the Halter USX China Index (PGJ) will most likely underperform its ETF peer, FXI. We have always preferred FXI and have been vocal about it. Still, PGJ is expected to cheer investors alongside Chinas overall economic growth.
In addition, we expect the Hang Seng to beat the DJIA in 2007 again. The Hang Seng Index is fueled by a 29% annualized increase in industrial profits, not to mention Chinas economic expansion of over 10 percent in 2006. This marks the fourth straight double-digit annual gain.
Looking at these indexes from a historical perspective, the following chart is worth a million words.
The green line represents the China Enterprise Index known as H-shares (.HSCE), the orange stands for the Hang Seng (.HSI), the red for the DJIA (.DJI) and the blue for the Shanghai Composite (SHCOMP).
The chart reveals that the H-share Index far outperformed any other major benchmark over the last five years. In addition, Shanghais 130% gain in 2006 helped it to surpass the DJIA and close in on the Hang Seng yet it is just in sync with the overall performance of those major indexes.
This chart suggests that gains of the Hang Seng and Shanghai Indexes are attributed mainly to companies making up for the H-share Index. Who are these mysterious H-shares?
Most foreign investors interested in Chinas companies prefer to trade H-shares, or mainland companies that list in Hong Kong, Shanghai and New York, and comply with international accounting and governance rules.
Companies from the H-share index that are listed both in Hong Kong and New York and thus are readily available for U.S. investors are: Aluminum Corp. of China (ACH) (2600.HK); China Life Insurance (LFC) (2628.HK); Guangshen Rail (GSH) (0525.HK); Huaneng Power (HNP) (0902.HK); PetroChina (PTR) (0857); Shanghai Petrochemical (SHI) (0338.HK); Sinopec Corp. (SNP) (0386.HK) and Yanzhou Coal (YZC) ((1171.HK).
The rest of the stocks, making up the H-share Index, are not listed in New York but include blue-chips like Bank of Communications 3328.HK), Bank of China (3988.HK), Datang Power (0991.HK) and China Shenhua (1088.HK) - just to name a few.
Still, investors can capture basically the same growth of the China Enterprise Index or H-shares and play the Chinese craze by investing in the ETF tracking the Xinhua China 25 Index: the FXI. As the following chart shows, there is extremely strong correlation between the performance of the H-share index (.HSCE) and the FXI. The chart tracks the FXI since its inception on 10/14/2004 along the H-share index.
Top ten stocks of FXI holdings are:
China Mobile 10.98%
PetroChina Co 8.81%
Bank of China Ltd 7.41%
China Life Ins. 7.33%
CNOOC Ltd 6.15%
BOC Hong Kong 4.22%
Sinopec 4.18%
Citic Pacific Ltd 4.15%
Ping An Ins. 4.05%
China Telecom 4.01%
The advantage of FXI over individual stocks is that since FXI represents 25 underlying stocks, it carries minimal company specific risk.
Still, if investors want to pick individual stocks, this is what we think. Large cap stocks will carry over momentum from 2006 and will continue to do well in 2007. Looking at the stellar performance of China Life Insurance (LFC), it is unlikely that the company will almost triple its value in 2007 as it did in 2006, but a high double digit gain is very plausible.
Large cap telecom stocks are expected to outperform in 2007 as well, just as we have seen them excel from the beginning of the second half of 2006. China Mobile (CHL), China Unicom (CHU), Hutchinson Telecom (HTX) and China Netcom (CN) are poised to capture the telecom frenzy.
The spectacular gains from the oil industrySNP, PTR, and CEO gained 92.2%, 79.2 and 44.1%, respectively in 2006are unlikely to repeat. Earnings of these companies are subject to international oil prices and we dont expect the crude oil run-up of 2006 being surpassed in 2007.
Looking back to 2006, one of the lessons Chinese stock investors learned is that you dont have to take high risk to achieve stellar returns. Small cap NASDAQ listed names, the most risky of the U.S. listed Chinese stock universe, are dominant among the worst stocks of 2006. Eye-catchy, fancy names or sound business models alone were not enough to support stock prices anymore. The erosion of eLong Inc. (LONG) from rival Crip.com (CTRP) is clearly the result of delivering results versus showing potential. The weak performance of the wireless value added services sector indicate that the blink-blink” is over.
Too bad I can’t paste the charts and tables here. For the full article you guys have to visit http://chinavestor.com
Blaze thanks for the newsletter link
A variety of issues may cause the “China bubble” to crash faster than anyone expected. First, U.S. food safety concerns have triggered a spate of new regulations on food imports from China, which will slow or halt food related manufacturing and shipments already in transit. Secondly, general concern about the “China bubble” is muting enthusiasm in the future of China’s manufacturing and agricultural sector. Third, trade negotiations have all but stalled because of Peking’s intransigence on issues such as large-scale dumping (witness the U.S. “glossy paper” tarriffs and other WTO lawsuits). Finally, complicity in genocide and lack of efficacy in international relations, such as PetroChina’s investment in the government in Khartoum, are causing China’s international image to plummet.
As an update, on the news there was talk of China’s continuing economic boom. I thought it was interesting a year later to see how that’s going. The link to the NBC report is
http://video.msn.com/video.aspx?mkt=en-US&brand=msnbc&vid=6df873da-673d-4666-882d-67167ec709aa
Also there’s a site that I enjoyed seeing as it fits a niche in the different investing sites.
http://chinesestocks-investchina.com
I think both are worth checking out, although I don’t know how long the NBC link lasts.
I think the NBC link is good for three weeks. Some video reports are then archived (I see some past China stories), but don’t know the system they use.
I think the NBC link is good for three weeks (I see some past China stories), then they get archived, but don’t know the system used.
Just bought several CALL options on Chinese stocks. Looks quite promising.
I own CMED (China Medical) Jan 08 Calls and the run has been amazing lately!
A very good Chinese company is CTrip.com (CTRP). It is the equivalent of Expedia, except it is in a much more dominant position in China. The runner-up is eLong.com which does about 1/10 of ctrip’s volume. I had extremely pleasant experience using ctrip but I don’t own the stock since it is priced very rich.
At his time though, a cheaper way to play China is to buy the Taiwan index fund (EWT) or the Australian index fund (EWA). Australia is about to conclude a free trade agreement with China and it has all the row materials China will need.