Newsletter January 2006

Chinavestor Beats Market for 2005   Chinavestor “Stock of the month” ends up 5.2% in 2005 and is up 55.6% since inception, despite the fact that China’s booming economy failed to translate into stock-market gains.  Defying  rises in oil prices and interest rates, Asia stocks rose as domestic economies picked up and foreign funds sought cheap valuations. But the country level performances were far from uniform with indices in the greater China region at the bottom of the list. Domestic markets were not any better, either. The Dow suffered its first down year since 2002, although other major indices posted modest gains for 2005. Yet, Chinavestor stock picks shined in 2005, again. We highlight one stock each month, called “Stock of the month”, to invest in. These recommendations are posted alongside our Portfolio recommendations on the last page of our Newsletters. Our 2005 performance of 5.2 percent is very remarkable given the weak Chinese stock market performance. Chinavestor introduced pure China Portfolio recommendations on September 1, 2005. We build Growth and Conservative portfolios of U.S. listed Chinese stocks. Our Growth portfolios consist of riskier stocks with high growth potential while our Conservative portfolio is identifying stable, big names. While the performance of the Growth portfolio  is dented by some small cap Nasdaq names, our Conservative portfolio showed strong resilience against negative market sentiment and gained 8.3 percent since inception in 2005.        The Chinese markets in 2005   In order to understand what was happening in 2005, we will compare four distinctive yet connected indices . The Hang Seng index is widely used as a benchmark for the Hong Kong Stock Exchange. The Dow (DJIA) consist of the 30  industry leaders from the U.S. The PGJ is based on the Halter USX China Index. The Index is comprised of U.S.–listed securities of companies which derive a majority of their revenue from China. And finally, the  Shanghai  Composite Index  is comprised of the largest 881 mainland Chinese stocks and is regarded as the measure of the Chinese stock market. As the chart below shows, most of the indices went south with the exception of the Hang Seng edging up 5.1%. The Dow was virtually flat, the PGJ lost 1.8 percent while the Shanghai Composite ended 2005 as Asia’s worst-performing index by losing 8.3 percent. One would ask: how come that the Shanghai Composite Index lost half of its value in the last five years, even while the economy has grown 50 percent? What’s wrong with the Chinese stocks? The problem is not the quality of the stocks but something deeper. In April, Chinese authorities suspended new initial offerings in its domestic markets, to allow regulators to sell its large government holdings in shares. The sell-off has added to the supply of shares in the market, and while the overhang of non-tradable shares is slowly disappearing, it may take years before the Chinese domestic stock market will be regarded a serious contender for investor funds. That’s why many of the big-ticket Chinese companies have opted to raise funds in Hong Kong. For U.S. investors with China focus, the picture is not as bad as it looks for the first sight. First of all, the Hang Seng closed 5.1 percent higher in year 2005. And remember, most of the NYSE listed Chinese companies, represented by American Depository Receipts or ADRs, are Hong Kong listings, also. Actually, taking a look at the inserted chart, there are 21 NYSE listed Chinese stocks within Chinavestor’s stock universe along with 22 NASDAQ and 4 AMEX listings. Out of these Chinese companies AMEX stocks rallied 98% on average, thanks to American Oriental BioEng. (AOB) and Bodisen Biotech (BBC). NYSE listings gained 6.9% on average while NASDAQ names lost (15.9%). NASDAQ names proved to be more volatile, also. The best performing listing, Focus Media Holding Ltd. (FMCN), gained 69.0% since its July-05 IPO vs. 51job Inc. (JOBS) that lost (71.1%) in 2005.  Among the NYSE names the best performer of 2005 was Hutchinson Telecoms. Intl. (HTX) by gaining 61.9% while SMI Corp. (SMI) qualified for the worst performing NYSE name among Chinese ADRs by losing (36.1%). What does this mean for investors? Should we avoid NASDAQ names in 2006? Not at all. Indeed, NASDAQ names are typically more liquid then their NYSE counterparts, providing excellent trading opportunities. Actually, four out of the  five most liquid names are NASDAQ names such as Baidu.com (BIDU), NetEase.com (NTES), Shanda Interactive (SNDA) and Sina Corp. (SINA). Interestingly, AMEX listed small cap Chinese stocks shined in 2005. Out of the four AMEX listings Chinavestor covers, American Oriental BioEng. (AOB) and Bodisec Biotech (BBC) gained triple-digits followed closely by New Dragon Asia (NWD) and Sinovac Biotech (SVA), both gaining double-digits in 2005. Will this trend continue??? The importance of reliable, independent research is greater than ever. Now, let’s break down the Chinese stock universe by sectors. Pharmaceuticals and Consumer Goods did outstanding. Both sectors are dominated by small cap AMEX listings skyrocketing both sectors. The outstanding performance of the Oil&Gas sector came as little surprise, both PTR, SNP and CEO gained double digits. Industrial metals is under represented in the U.S. markets by a single player, Aluminum Corp. of China (ACH). Yet ACH gained 35.6% on strong demand for aluminum. China Life Insurance (LFC) represented the life insurance sector while she gained 30.7% in 2005. Communication Services (FMCN and XING) and Mobile Telecoms (CHL, HTX, CHU, LTON, HRAY, KONG) had a strong year as well, gaining well over 20 percent. Chemicals, Telecommunications, Electricity and Fix Line Telecoms did about average in 2005. The disappointment of the year came from the Support Services and Leisure Goods sectors (JOBS, SNDA, NCTY, GRIN) as both sectors dropped high double digits. In fact, the whole online gaming industry suffered losses, on average. Disappointment of the mining sector came to many as a surprise, at least to many of our customers. However should they have read our Yanzhou Coal (YZC) Q2 analysis on time, they could have avoided losses. Well known NASDAQ names represented the Software&Computer Services sector (SOHU, TOMO, NTES, BIDU, NINE, JRJC,SINA ASIA) and did just about the same as the average NASDAQ listed Chinese stock universe.   Having said that, the question still remains: what does past performance tell me about future stock performance, if any? And if so, what stocks to buy then? Smart investors know that DIVERSIFICATION is the key. And they know that Exchange Traded Funds (ETF) are designed to deliver just that. So our advice to beginner China investors is to get into one of the following ETFs: FXI or PGJ. As the chart below shows, both ETFs track the Hang Seng (Hong Kong) index very closely and are not correlating closely to the Shanghai Composite Index (SSE). And while FXI is intended to provide direct access to China by investing in shares listed on the Hong Kong  Stock Exchange, they also invest in U.S. traded shares of China based companies. On the other hand, PGJ is designed to provide insight and access to the unique economic opportunities taking place in China while still providing  the transparency offered with U.S. listed securities. And because the companies in the PGJ are listed in the U.S. while conducting a majority of their business in China, investors are shielded from currency risk. Before you get over excited about PGJ, let’s see the actual performance. Actually FXI not only outperformed PGJ in 2005 as the chart shows it above but is ahead of PGJ since its inception. For us, it looks, as if the old cliché holds true: Chinese companies enjoy the benefit of the home markets. For nuanced investors we suggest reading our comparative study of FXI vs. PGJ located among the listed Research reports at our website (www.chinavestor.com). We understand that experienced investors don’t want to leave anything on the table by investing into quasi indices. And they are right. Assuming they have a fair understanding of investing in China and the risks associated with it, one can pick stocks that outperform all major indices repeatedly. Just as our “Stock of the month” stock picks do. Actually, we are on a view that the Chinese internet sector will recover in 2006 led by Baidu.com (            BIDU) and Sohu.com (SOHU). Tom Online (TOMO), NetEase (NTES) and  online traveler Ctrip.com (CTRP) looks promising, too. On the NYSE side, airliners (ZNH and CEA), petrochemicals (SNP, PTR) and telecoms like China Mobile (CHL) are our best bet. However the importance of reliable research is enormous. We strongly recommend our clients taking advantage of all the resources offered by Chinavestor. To access latest Newsletter and other research content, please register!