December 2, 2009 (Chinavestor) Stock mentioned in the issue include: LDK Solar (NYSE:LDK), Trina Solar (NYSE:TSL), Suntech Power (NYSE:STP), China Mobile (NYSE:CHL), China Telecom (NYSE:CHA), China Unicom (NYSE:CHU), China South Air (NYSE:ZNH), Sina Corp. (NASDAQ:SINA), Sohu.com (NASDAQ:SOHU), GA Interactive (NYSE:GA), Changyou.com (NASDAQ:CYOU), NetEase.com Inc. (NASDAQ:NTES), Shanda Games (NASDAQ:GAME), Shanda Interactive (NASDAQ:SNDA), Baidu.com (NASDAQ:BIDU), and Origin Agritech (NASDAQ:SEED) .
November 2009 marked the third straight month of gains for China stock investors world wide. The 20 % correction in Shanghai in August is now history as the Shanghai Composite index is fighting the 3,200 level. Investors have been upbeat in the Mainland as domestic consumption, real estate development and infrastructure spending looks to fill in the gap the export fallout left behind. Policy makers in Beijing just announced no immediate plans to alter the stimulus package, unveiled last November, reassuring investors that loose lending and consumer stimuli is here to stay.
Besides Chinese investors, westerners have been upbeat and snapped up assets in Hong Kong, pushing the Hang Seng Composite to new 2009 record levels in November. Chinese companies delivered strong earnings making valuations attractive despite the significant surge in 2009 so far.
Yet there is a lot of uncertainty around the health of the global economy, highlighted by the swift fall and recovery of the Hang Seng Index at the end of November. HSBC Plc. (HKG:0005), Britain’s largest bank, is said to be one of the most exposed among western financial institution to the Dubai credit crisis and acted accordingly. HSBC Plc., a Hang Seng Index heavy weight, fell over 7% on Black Friday and bounced back 4.25% on Monday, adding unusual volatility to the Hong Kong’s main index. But American investors, consumed by domestic news such as Holiday shopping and jobless reports later this week, provided stability to global markets, minimizing the damage of the Dubai credit crisis.
One possible scenario is that the ripple effects of the Dubai default on debt triggers massive assets write offs of western banks, already embattled by the credit crisis, hampering the recovery of the world economy. In such scenario the dollar is expected to strengthen as investors seeks refuge in the green back, sending oil prices lower. This would help airliners but hurt energy and commodity plays.
The more likely scenario is that the fall out of the debt crisis will be contained and won’t dent much into the recovery of the global economy. In this case company specific news and valuations are going to play a key role in determining future stock prices.
So let’s talk about the latest developments of the third quarter financial results.
One of the most pleasant surprises came from the Chinese solar sector. Each and every Chinese solar play reported strong revenue growth for the third quarter, most issued an improved revenue outlook for 2009 Q4 and beyond. Just as importantly, all solar plays returned to profitability as the price of raw material fell.
But as the chart above suggests, the performance of solar stocks is far from universal. Trina Solar (NYSE:TSL) has been the best YTD with a staggering 410% return way outperforming LDK Solar’s –38% fall in 2009. But if you look into the second chart, LDK Solar has been almost as good as Trina Solar in the month of November. This in turn suggests that a rotation is taking place within the solar sector, e.g. underperformers are catching up with those that have been strong all along.
Another sector we’ve been betting on is the Chinese aviation industry. China Southern Airline (NYSE:ZNH) has been on the “Conservative” portfolio for 12 months bringing in a 124% return. We issued a sell email alert on November 16, right at the top of her trading range in November. Despite a significant correction following November 16, we remain bullish of China Southern Airline (NYSE:ZNH). Passenger traffic has been strong, kerosene prices remain below 2008 levels making a strong case for Chinese airliners.
We also paid close attention to the Chinese telecommunications market. There has been a lot of speculation about the 3G fallout following the hand out of licensing for the three largest Chinese telecom companies. China Telecom (NYSE:CHA) has been considered one of the best to benefit from the 3G fallout and the stock rallied in the first five months of the year. But as soon as statistical data suggested that none of the smaller carriers will be able to break China Mobile’s dominance, China Telecom lost its shine and fell back.
The good news is that all three carriers have been underperforming all major indices in 2009, making a case for a profit opportunity from the upcoming sector rotation. That rotation is about to come with the excitement of the 3G revolution in China. As soon as subscriber numbers reinstate expectations of a strong 3G growth, expect China Mobile (NYSE:CHL) to take off. While there is still room left for natural growth, investors realize that China’s telecommunications market is 80 percent saturated. China Mobile has over 505 million subscribers but future revenue growth is expected to come from squeezing more out of each subscriber. The 3G phone revolution is a perfect platform to do that and is a likely scenario in tandem with the emergence of the Chinese middle class.
Another stock we paid close attention to was Yanzhou Coal (NYSE:YZC), China’s third largest coal miner. This energy play was added to the Conservative Portfolio in June 2009 at $12.36 followed by an email alert to sell on November 18, 2009 just under $20. The 93% return in just 6 months was too good to miss though there has been a lot of fuel behind the stock leaving more upside potential for the risky investor.
Chinese internet stocks reported mixed results. Baidu.com (NASAQ:BIDU), one of our long time favorites, reported strong revenue and earnings growth but lowered Q4 outlook and got hammered as a result. This was very similar to Sohu.com (NASDAQ:SOHU), another internet play that reported strong results but got punished for lack of revenue growth for the rest of the year. Despite the challenges, we remain bullish on both stocks based on historical performance and on dynamics within the Chinese internet sector.
Sina Corp. (NASDAQ:SINA) and Sohu.com (NASDAQ:SOHU) have a difficult situation in 2009 due to a strong online advertisement revenue growth in 2008. Remember that Beijing hosted the Summer Olympic Games in 2008 resulting in increased online ad spending, setting the bar high for the entire Chinese online sector.
But as the following chart on this page suggests, there has been a widening gap between the performance of Sina Corp. (NASDAQ:SINA) and Sohu.com (NASDAQ:SOHU) in November, a clear indication that the markets took a better reading at Sina’s numbers than Sohu.com’s. But considering that these two companies have been operating within the same industry and have been trading in tandem for the most part for the last seven years, Sohu.com looks more attractive at this point.
Another set of stocks from the internet sector are online game developers and operators. This is a rather important segment because they are the most profitable internet stocks generating the most revenue online, surpassing that of online advertising and search. Shanda Interactive (NASDAQ:SNDA) and its onlie game unit, Shanda Games (NASDAQ:GAME) is gong to report on December 1 after the close, but the rest of the sector has already reported mixed results. The old cliché, that a well diversified online game portfolio holds the key for sustainable growth, is just as important today as five years ago. Giant Interactive (NYSE:GA) and Changyou.com (NASDAQ:CYOU) lost market share to Perfect World Co. (NASDAQ:PWRD) and Shanda Games (NASDAQ:SNDA) while NetEase.com (NASDAQ:NTES) was cruising along. Markets took note of that and punished stocks with less impressive or negative user growth. GA Interactive (NYSE:GA) and Changyou.com (NASDAQ:CYOU) have one blockbuster game each, but that alone is not sufficient to keep non-loyal, young online gamers playing their games. To the contrary of GA and CYOU, Shanda and NetEase.com have a much larger game developer base, both boost strong game pipeline with more titles to hit the market in the fourth quarter of 2009 and beyond. While we don’t know what Shanda is going to report tonight, one thing is for sure: when it comes to online game developers and operators, game pipeline holds the key.
And finally, we want to highlight that there has been a lot of speculation around Chinese stocks in November, making conservative investors cautious. Origin Agritech (NASDAQ:SEED) advanced 156% in the last six trading days alone, something that just makes us alert.Report in PDF format is available: Newsletter_Dec09.pdf