This article was first published on Mar 16 on the writer’s blog and has been adapted for publication here with the kind permission of the author.
“CHINA STOCKS not looking pretty” was the title of an analysis recently in The Business Times, and the reason is Prime Partners China Index, the index for China companies listed on SGX, has melted 56% since Oct 1, 2007.
A drop of 56% is painful, of course, so it’s no wonder that journalist Teh Hooi Ling came up with such a title. For investors with patience and a long-term view, this stock plunge presents buying opportunities.
This is not the first time this has happened. Back in 2004/2005 during the China Aviation Oil saga, almost every China stock (from a smaller pool then) was thrown away.
If I remember correctly, one could easily buy stocks trading at 4 to 6X earnings. But not many investors seized the opportunities because, well, no one trusted Chinese management anymore after what happened at CAO.
They were perceived to be of second or even third class quality, which is why I don’t remember reading commentaries saying that it was a good time to buy China stocks.
Times changed subsequently, and China stocks came back into favour from the start of 2006 until late 2007. These stocks, especially new IPOs, easily traded at 15 to 30 X earnings. Almost everyone forgot what happened just a year or two back.
In the current overall market decline, China stocks seem to be hit especially hard. I can easily find China stocks trading at single digit valuation with some going back to 4 to 6 X earnings again.
The swings in investor moods present opportunities for investors to buy cheap again. It is usually when the near-term outlook sucks that stocks sell at a low valuation.
Third Avenue Funds founder and fund manager Martin Whitman keeps saying this, and it is perhaps true right now with inflation eating into the margins of many China companies. They also face global economic uncertainty.
But like the changing moods of investors, the economy will change from negative to positive again. We can always buy when everything looks negative, hold on until things look good again.
Sir John Templeton along with Shelby Davis and others were among the first foreign investors to see the enormous potential in Japan in the 1950s & 1960s. Japan was a country characterized by high GDP growth. It was developing from simply being a low-cost producer of textiles into producing higher value added industrial goods. Japan’s people were savers and worked hard. Finally, the government was slowly loosening the rules on foreign ownership and opening up the economy.
And…
Japan was ignored by most investors who still saw it as a producer of cheap and inferior goods and a country that lacked the economic might of the United States . As a result stocks were very cheap. Templeton rode the Japan stock market juggernaut over the period of 1959 into the 1980s. From 1959 to 1989 the Japanese index rose 36x from its original value (see graph p 93 “Investing the Templeton Way ”).
Let’s not forget that from 1959 to 1980s, there were commodities bubbles and stagflation in the 1970s. While Japan ended up in a secular bear market after 1989, an index that rose 36X in 30 years is super impressive. The lesson: a super bull run always begins in a market where valuations are low.
China stocks are not super cheap going by the Shanghai Index or those listed in Hong Kong. Those listed in Singapore are different because SGX is not the No. 1 choice of many China companies, especially the bigger ones. That is why many foreign investors give Singapore-listed China stocks a miss.
As a result, periods of low valuation can prevail. I do not know whether it is good to buy many China stocks that trade at 4 to 6 X earnings but low valuations provide a good margin of safety.
Here is a list of China stocks which either I own or are on my watchlist.
| Recent price | 52-week high | Historical PE based on recent price | Price/book | ROE in last 3 years (2007,2006, 2005) | |
| Beauty China | $0.98 | $1.48 | 12 | 2.8 | 23.4%, 31.2%, 34.1%. |
| Bright World | $0.495 | $.0.76 | 7 | 1.8 | 25.27%, 24.95%, 43.3%. |
| Celestial | $0.56 | $1.72 | 4.3 | 1.03 | 23.93%, 26.47%, 29.04% |
| China Energy | $0.565 | $1.87 | 13.7 | 2.16 | 15.84%, 13.49%, 17.68% |
| China Powerplus | $0.17 | $0.435 | 5.04 | 0.78 | 15.55%, 19.44%, 26.99% |
| China Kangda | $0.32 | $0.56 | 6.6 | 1.2 | 18.71%, 20.04%, 176.07% |
| Full Apex | $0.275 | $0.435 | 7.5 | 0.93 | 12.36%, 13%, 15.93% |
| Hsu Fu Chi | $0.96 | $1.38 | 15.3 | 2.06 | 13.49%, 18.47%, 16.42% |
| Jiutian Chemical | $0.15 | $0.77 | 17.3 | 1.8 | 8.73%, 21.80%, 94.79% |
| Lizhong Wheel | $0.545 | $1.25 | 6.16 | 1.66 | 26.89%, 26.83%, 25.60% |
Midsouth | $0.535 | $0.93 | 6.83 | 1.64 | 24.06%, 27.13%, 100.25% |
| Ouhua Energy | $0.245 | $0.74 | 8 | 1.17 | 14.69%, 24.65%, 29.57% |
| PFood | $1.07 | $2.22 | 12.4 | 1.4 | 7.54%, 15.90%, 16.12% |
| Pine Agritech | $0.135 | $0.71 | 4.74 | 1.23 | 25.93%, 39.37%, 23.47% |
| SP Chems | $0.495 | $0.90 | 5.2 | 1.2 | 23.05%, 28.68%, 26.56% |
| Sunray | $0.07 | $0.255 | 4 | 0.4 | 10.01%, 22.04%, 22.61% |
| Sunvic | $0.19 | $0.765 | 6.45 | 0.8 | 12.33%, 21.22%, 72.58% |
| Synear | $0.46 | $2.44 | 7.1 | 1.19 | 16.73%, 32.98%, 131.43% |
| Techcomp | $0.38 | $0.685 | 7.05 | 1.18 | 16.72%, 19.48%, 19.81% |
Just looking at the list, I can easily find 5 stocks trading at historical PEs of 4 to 6 . The rest of the stocks are not that expensive as well.
This list was not specially picked just because they are trading at low valuations. They are specially picked because I have their numbers readily at hand.
The actual number of SGX-listed China stocks is about 6X my list, which means there can be as many as 20 to 40 China stocks trading at 4 to 6 X earnings.
Possibly 70% of all China stocks listed here are trading at single-digit earnings. Wow, not bad, lots of stones to turn. What’s more, most of them are not loss-making and some are even very profitable.
The current low valuation can last a few months or as long as a few years but let’s not forget a famous quote from Ben Graham, “The market is there to serve you, not to guide you.” It’s time to do more digging.
"donmihaihai" is a 30-year-old retail investor.
Related article: "I'm keeping my money in China" - Jim Rogers
