Making Money with Chinese IPOs

Wed, 02 Nov 2011 13:09:13 +0100

Chinese stocks are again the focus of increased attention and speculative trading. In China, the benchmark Shanghai Composite Index (SCI) had been rallying. It’s up over nine percent this year, which is encouraging given that the index lost 14.31% in 2010.

An area that we continue to see some action is in Chinese initial public offerings (IPOs), but to a lesser degree due to the negative publicity of Chinese reverse mergers.

There are so many Chinese penny stocks and micro-cap stocks waiting to cross the ocean in search of U.S. dollars and exposure. The key to successful stock picking in this area is research.

In a report compiled by legal firm Pillsbury, over 30% of the 200 companies interviewed said they would prefer to seek a listing in the U.S. About 45% preferred Hong Kong or China.

We have seen numerous successful Chinese IPOs over the past two quarters.

In December 2010, Chinese online video superstar Youku.com Inc. (NASDAQ/YOKU), which was subscribed at $12.80, surged to close at $33.44 on its first day of trading, up a staggering 161% in a day! Fast forward a few months and YOKU is trading at over $65.00, up over 400%. The attraction here is that the company has a 40% penetration rate in China’s massive Internet market in which there are over 420 million people. Can you hear the cash register?

In my view, I feel that the buying frenzy is somewhat optimistic. Another example is Chinese online real estate portal SouFun Holdings Ltd. (NASDAQ/SFUN), which debuted at $67.00 on September 17 and surged to nearly $100.00 before initiating a four-for-one stock split on February 18. The stock is holding at over $23.00, or $92.00 on a pre-split basis.

An interesting company that is set to debut here is China-based Zenix Auto International, a manufacturer of commercial vehicle wheels for China’s aftermarket and original equipment manufacturer (OEM) markets along with over 30 countries worldwide. Estimates peg the company’s market share at 16.6% in 2009, according to Frost & Sullivan. For the year to December 31, 2010, revenues came in at $485 million, up 50% year-over-year. Annual earnings were $50.0 million, or $0.31 per diluted share. The lead underwriter is Morgan Stanley.

The key to trading Chinese IPOs is to wait for several weeks and watch to see if the stock settles down in a set buying range. Buying on the first day can generate some impressive returns, as we saw with Youku.com and SouFun, but it also makes you vulnerable to profit-taking, especially if you are not one of the lucky clients who did not get in near the IPO price.

The rule of thumb is being patient: follow the stock and wait for weakness to buy. This is only fitting, as patience has been a critical trait in China for thousands of years.

China Pays for Growth with Rising Inflation

Wed, 02 Nov 2011 13:03:45 +0100

China is the second-largest economy in the world and is continuing to roll along at a nice pace. The International Monetary Fund (IMF) recently downgraded U.S. GDP growth to 2.3% this year from the previous 2.9% but concurrently raised China’s GDP growth to 9.9% this year—up from the previous 9.7%. This is why you need money in China.

The results reflect the significant growth difference between China and the U.S. and Europe. China is continuing to roll along at high speeds, but it must be controlled.

And while the growth is impressive, my economic analysis is simple: the superlative GDP growth is great, but the problem is the associated inflation that often surfaces as consumers spend more, and we know that spending is spreading like wildfire in China.

In April, the country’s consumer price index (CPI) was 5.3%—slightly lower than its March 32-month high of 5.4%, but still high by any standard. The CPI acts as a good way to gauge inflation. The average inflation rate in China from 1994 to 2010 was 4.3%, so there needs to be some work done here to relieve the inflationary pressures.

The reality is that prices continue to rise as consumers continue to spend, so we expect more tightening via either higher interest rates or higher bank-reserve requirements in China (or both).

Moreover a report that was just released indicates that real-estate values in China continue to rise in many of the tier-one and tier-two cities. This will force the government to look at further tightening, as some of the rise is due to speculative buying.

Interest rates continue to ratchet higher, and I expect the upward move to continue. The Chinese government has placed a cap on certain food products and subsidizing some of the poorer rural workers.

Traders in Asia are probably encouraged by the Chinese government’s battle against inflation and to control the rate of growth. China needs to make sure to keep its course and tackle inflation, since rising prices will hurt the majority of the 1.3 billion people living in China who are just trying to get by on a daily basis.

Chinese inflation is a real potential threat to growth and stability—not only in China, but globally with its trading partners. We could see higher-cost Chinese-made goods as prices rise, and this will drive up the prices of Chinese-made goods that are sold in the U.S.

Overall, China is on the right path toward developing into a rising world economic power, as well as a basin for incredible and sustained growth across many sectors, including industrial, mining, energy, services and technology. The reality is that if it is saleable and in demand, then you know that China will likely have a consumer market for it. China knows that, and so do many of the top multinational companies, including many in the U.S.

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Making Money with Chinese IPOs

China Pays for Growth with Rising Inflation