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September 24, 2006

How to Invest In China Stocks? How Chinese Companies Like China Development Group Corp & China Energy Savings Are Going Public Without Venture Capital

posted by MR WAVETHEORY at 9/24/2006 02:02:00 AM
Investing in China is a hot topic today because of the unusually high growth rate of Chinese companies. The stock market in China is up around 50% in 2006 alone. You're not alone if you are now asking:
  • How do I invest in China stocks? How do I find China stocks?
  • What types of China stocks are good investments?
  • Why some China stocks are really venture capital investments?
How do I invest in China stocks?
Investing in China stocks has never been easier because many Chinese companies are actually listed in the US. Some of the larger Chinese companies include:

China Mobile Hong Kong (NYSE CHL) - #1 mobile operator in China
Huaneng Power (NYSE HNP) - #1 independent power producer in China
China Petroleum & Chemical (NYSE SNP) - #1 oil and gas company in China

Yahoo has a very nice tool to find China stocks. An easy and quick way to find China names is to go to Yahoo Finance and type in China in the symbol lookup box:

Yahoo Finance Search for China Stocks - 221 China stocks
Yahoo Finance Search for China ETFs - 2 China ETFs
Yahoo Finance Search for China Indices - 24 China Indices
Yahoo Finance Search for China Mutual Funds - 81 China Mutual Funds


It's actually very easy to find China stocks, China ETFs, China Indices, and China Mutual Funds.

What types of China stocks are good investments?
There are many companies which have China in their name but are not really China companies. As Richard Gao from Matthews China Fund points out, Investing in China Demands Being Very Very Careful. Part of the reason is that:
  • Chinese companies have different methods of calculating GAAP income and GAAP earnings
  • Chinese companies go public using reverse mergers which do not have the same financial reporting requirements as a formal IPO
  • Chinese companies often are listed on the bulletin board (OTC BB, Pinksheets)
In order to achieve your investment objectives, you must determine:
  • What is your return objectives? - Are you speculating for a double or are you content earning 10%?
  • What is your liquidity requirement? - Do you have to use the cash immediately or are you able to hold the stock for a while?
  • What is your time horizon? - Are you in a for a few days, weeks, or years?
It is important to answer these questions because there are both large publicly traded Chinese companies which have decent cash flow as well as many small Chinese companies which are what can really be seen as a venture capital stage company.

Take the example of China Mobile Hong Kong (CHL), which is the number one mobile phone company in China. China Mobile has appreciated from around $20 to $35 in the last year alone. That is a greater than 50% return in just 12 months. Any return greater than 50% is fantastic. But wait until you hear about China Development Group Corp (Nasdaq CTDC).

China Development Group Corp has had several instances in which it has more than quintupled in a few days. In fact, on Friday, the stock closed up 47% (+$1.50) at $4.65. That is a 50% return in one day. China Technology Development Group is an small Chinese internet security and software company based in Hong Kong. It is a perfect example of a small Chinese company that offers venture capital type returns to investors.

When there are both large and small China companies to choose from, investing in China stocks can be confusing. That is why investors should answer those 3 questions listed above before venturing into China stocks.


How come China Technology went up so much in one day? Why some China stocks are really venture capital investments?
The reason some China stocks like China Technology Development can gain 47% in one day is that they are really early stage companies that have chosen to go public to seek financing rather than seek venture capital. China has a very underdeveloped venture capital market, so Chinese companies like China Technology Development offer US investors the opportunity to invest in early stage growth companies that would otherwise be unavailable to retail investors. It's possible to make large amounts of money investing in the correct companies. The stock could easily go to $20 because it is a venture type investment. However, there are also risks - as history has shown it could also go below $1.

Companies like China Development offer investors the ability to basically be venture capitalists. The company went public through a reverse merger with Tramford International in late 2005. As a result, the company which was previously private became a public company in the US. Unlike traditional IPOs, reverse mergers are less expensive than IPOs because they demand a different set of accounting requirements. This may be good or bad. In the case of China Development, the company has been very volatile because it failed to file a Form 20-F which is the annual report for foreign issuers earlier this year. As a result, the stock took a dive. A few days ago, China Development regained compliance by filing a Form 20-F. That is why the stock rallied 47% on Friday. It is a perfect example of both the risks and rewards of investing in small, early stage companies.

By investing in small Chinese companies, you are being a venture capitalist. Venture capitalists accept many risks when they invest in early stage companies because often there is alot of potential but very little revenue. Because there is not a well developed venture capital community in China, US investors have an opportunity to be quasi VCs by investing in companeis that have gone public through reverse mergers. For every China Development, that fails to comply with listing rules, and eventually regains compliance, there are 9 or 10 China Energy Savings Technology, Inc (CESV) - a company that was not only non compliant but is now delisted and trading at 25 cents. It is the same in venture capital. For every 1 winner, there are 9 or 10 blowups. That is why the risks and rewards are so abundant in China. If you have the appetite for the risk and the ability to accept it, you too can be a venture capitalist!

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2 Comments:

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2:47 PM  
Blogger smith said...

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