(Chinavestor) 2010 has been a difficult year for investors so far. Despite a strong comeback for American indices in February, most benchmarks are still in the red for year-to-date. And while American investors had a hard time to adjust to the reality of 2010, Chinese investors have suffered more severely. The DJIA rebounded 2.6% in February but the Shanghai Composite gained only 2.1% and the Hang Seng advanced lagged behind her U.S. counterpart with a 2.4% advance. China stock investors know that this is a hardly unusual case, e.g. strong U.S. markets outperform lackluster Chinese ones.
Stock mentioned in this report include NetEase.com Inc. (NASDAQ:NTES), Mindray Medical (NYSE:MR), Home Inns & Hotel Mgmt. (NASDAQ:HMIN), China Life Ins. (NYSE:LFC), Bank of Communications (HKG:3328) (SHA:601328), SAIC Motor Corp. Ltd. (SHA:600104), China Vanke (SHE:200002), Poly Real Estate (SHA:600048), Ctrip.com (NASDAQ:CTRP), Baidu.com (NASDAQ:BIDU), Sohu.com (NASDAQ:SOHU), Changyou.com (NASDAQ:CYOU), Shanda Int. (NASDAQ:SNDA), Shanda Games (NASDAQ:GAME), China Unicom (NYSE:CHU), China Telecom (NYSE:CHA), China Mobile (NYSE:CHL), Perfect World (NASDAQ:PWRD), and Giant Interactive (NYSE:GA).
The good thing was that most of the gains were expected after a close to disastrous January performance. For this exact reason we gave the “Too much anxiety” title to the January Newsletter highlighting reasons why we think the markets will make a comeback. Hope most of you listened and took advantage of the resurgence in February. Even better, both Chinavestor portfolios, Conservative and Growth, outperformed all major Chinese and American indices for the month and year-to-date. To highlight the strength of the Growth portfolio, consider that eight out of the nine components ended the month in the black with Baidu.com (NASDAQ:BIDU) sticking out with a +26.0% performance. But it wasn’t Baidu.com only that propelled the Growth portfolio up +8.4% for the month. Mindray Medical (NYSE:MR), Home Inns & Hotel Management (NASDAQ:HMIN) and Ctrip.com (NASDAQ:CTRP) all contributed to the spectacular performance. As always, diversification proved to be key—this is why we had nine stocks in the portfolio for the month. For portfolio updates, please visit “Premium Content” page on Chinavestor.com.
But I would be dishonest saying that March is going to be a cake walk… Most of the difficulty is a result of mixed economic data. The increase of market volatility is a true reflection on the market—a market with no direction. While latest GDP numbers surprised investors to the upside sluggish housing data and weak jobless numbers are a painful reminder that the economic recovery will be slow and gradual.
And China’s problems are just as difficult as those of the U.S. The difficulty is different in nature but solving it is just as much a challenge. Most of the problem is stemming from last year’s success: pumping liquidity into the economy. While excessive lending helped China to jumpstart its economy in an instant at the outbreak of the global financial crisis, investors are now worried about the effects of such a successful tool. The lesser problem is that China’s financial system depleted its capital to a degree that banks have to raise cash. China’s fourth largest financial institution, Bank of Communications (HKG:3328) (SHA:601328) aims to raise as much as $4 billion in capital after similar measures taken by Bank of China (HKG:3988) (SHA:601988).
The larger problem is that a dramatic increase in money supply most likely contributed to a rise in non-performing loans, pushed property prices higher while consumer demand has been slow to pick up excess capacity. China signaled that it is going to wind down the stimulus package after 10.7% GDP growth in the fourth quarter. Investors now worry about the exit strategy and how it is going to effect the markets. On the positive side though, January inflation came out lower than forecasted giving central banks more room before fiscal tightening.
On the stock level, earnings expectations helped car manufacturers while oversold real estate and construction related stocks bounced back up strongly after the January free fall. Looking at the fifty largest stocks, measured by the SSE-50 index, from the Shanghai Composite Index (SHA:000001), car, metal and real estate stocks performed the best in February.
Record car sales continued in January after 45% growth in year 2009, helping shares of car manufacturers. Shares of SAIC Motor Corp. Ltd. (SHA:600104), the largest Chinese car manufacturer, advanced +9.3% for the month, making it the best performing large cap stock from the SSE-50 index.
Construction material and real estate stocks rebounded sharply sending shares of the largest Chinese steel maker, Baoshan Iron & Steel (SHA:600019) +6.1% for the month.
Shares of China Vanke (SHE:200002), the largest listed Chinese real estate developer, advanced +5.6% followed by smaller rival Poly Real Estate (SHA:600048).
But Chinese insurers continued to suffer; Ping An Insurance (SHA:601318) fell –3.1% while larger China Life Insurance (SHA:601628) (NYSE:LFC) shed –0.3%. While the core business of insurer companies remains solid, investors are turned off by the lack of growth in investment return. Remember, Chinese insurer companies derive a significant portion of their income from investment returns, a sluggish proposition when upside for the Shanghai Composite Index is uncertain.
Chinese shares in Hong Kong fared better in February, taking merit from the strong performance of American equity markets. The Hang Seng Index advanced 2.4% for the month, its best performance since October 2009. The good news is that valuations remain attractive thanks to strong earnings and a 10% fall from November highs.
As far as U.S. listed Chinese shares are concerned, earnings are going to dominate March. The earnings calendar is full of action with industry leaders reporting throughout the month. For a complete earnings calendar for Chinese stocks bottom of this Newsletter.
Some of the highlights from February: Baidu.com (NASDAQ:BIDU), the largest Chinese search engine company with a market share of over 64%, reported better than expected revenue and earnings growth, propelling the stock above the $500 mark for the first time. No wonder the stock is among the twenty-five best performing Chinese stocks for the month.
NetEase.com Inc. (NASDQAQ:NTES) reported record revenues while earnings were slightly under last year’s mark—but online advertisement performed above expectations thanks to improved margins. This in turn suggests that investors might be up for a pleasant surprise from Sina Corp. (NASDAQ:SINA), one of the most popular Chinese online portals, whose core revenue stream is online advertizing. Sina Corp. (NASDAQ:SINA) is going to report 2009 fourth quarter earnings on March 3 at 8:00 P.M. after the close.
Another stock we have been following closely is Ctrip.com (NASDAQ:CTRP), the largest Chinese online travel agency. The stock showed significant weakness right after the earnings report on February 2—5 but as we pointed out in the “Ctrip ‘09 Q4 disappoints— How bad is it? article on February 3 “my reading on current financial report is much better then those investors who sold it last night. Time will tell who was right. ” - we predicted a strong comeback. With a +22.2% advance for February, time has proven us right.
Mindray Medical (NYSE:MR), a good size Chinese medical equipment maker, is another stock we have liked—as is evidenced by its inclusion in the Growth Portfolio since January 1, 2010. The company is going to report earnings on March 2, at 8:00 A.M. While it is premature to tell what number we’re going to see, we’re expecting a pleasant surprise based on our internal analysis.
Another key stock to report in March includes Shanda Games (NASDAQ:GAME) and her parent company, Shanda Interactive (NASDAQ:SNDA). The companies are scheduled to report on March 1 before the market opens and will give a full visibility into the Chinese online game sector given that NetEase.com (NASDAQ:NTES), Changyou.com (NASDAQLCYOU) have already reported. As the following chart on this page testifies, Shanda Games (NASDAQ:GAME) made it among the worst 25 China stocks in February—GAME is the second from the end of the list. But that is no way an indication about upcoming earnings. Investors have to bear in mind that Shanda Games (NASDAQ:GAME) is the largest Chinese online game developer and operator with a diversified game portfolio. The company boosts the largest developer base as well, suggesting that even if earnings were somewhat disappointing, abandoning the stock would be a mistake.
Actually March 1st. Is going to be the day for online gamers with Perfect World (NASDAQ:PWRD) reporting the same day before the open with only Giant Interactive (NYSE:GA) left to report for the quarter later in the week. We have seen significant investors’ interest toward Giant Interactive (NYSE:GA) on the overbought/oversold monitor so far, but if that is going to remain after March 1st is too early to tell.
Another sector we have been paying close attention to is the Chinese telecommunications sector. We have been arguing that China Mobile (NYSE:CHL) is the best positioned to penetrate the market with her low cost, fully functional 3G phones. While we have no reason to alter our assessment at this point, analysts at Deutsche Bank think differently. China Unicom (NYSE:CHU) got a significant upgrade from a Deutsche analyst from Sell to Buy—this alone speaks volumes of the quality of their previous estimate– while China Telecom (NYSE:CHA) got an upgrade to Buy from Hold. Shares of China Unicom (NYSE:CHU) jumped $.92 or 8.18% on Friday on the news and more strength is likely to follow in the upcoming days. Nevertheless we’re of a view that China Mobile (NYSE:CHL) is going to deliver the biggest bang in 3G and offers value for the medium– to long-term investor.
Investors are going to get a much better visibility into the Chinese solar sector in March. To highlight the discrepancy in February market performance, consider this: we have two solar stocks among the best 25 and three among the worst 25 stocks for the month. We see the glass half full at this time, considering solar plays as a high risk/high return category with a good chance to surprise us to the upside. Time will tell if our gut feeling was right.
Wish you successful investing, Blaze Fabry
Earnings Calendar 2009 fourth quarter