The China sell-off has created opportunities for smart investors, particularly those who are buying the smaller-cap companies. China U.S. listed emerging growth stocks that were trading at 10-15 P/E’s one month ago are now trading at 5-7x EPS. Many of these companies will continue to grow revenue and earnings in the double digits despite the effects of a devalued euro. We should note that the China real-estate bubble is limited to large cities such as Beijing and Shanghai and some of the second tier cities such as Dalian and Quingdao and exotic resort cities such as Macau. Unlike the properties in the U.S. bubble these residential and commercial holdings are not leveraged 30-1, nor have they been collaterized in bonds insured by credit derivative swaps.
When we think about China’s economy and its U.S. listed emerging growth companies we should consider the following:
1. China will continue to benefit from an endless supply of cheap labor.
2. China will not revalue its currency in the near-term; thus the U.S. will continue to benefit from China’s endless supply of cheap labor with an endless supply of cheap imports.
3. More Wall Street capital is flowing into Chinese U.S. listed companies than at anytime in history, of which there are over 200 Chinese companies listed on U.S. Exchanges currently.
4. The emerging growth companies in China, whether they are selling coal, fuel, textiles, education, or media are not dependent on investment from Chinese banks; they are getting all the capital they need from the U.S. Capital markets.
5. The Chinese government, which has come as close to any country in perfecting State Capitalism, will continue to manage its economy pragmatically and competently without the mitigating factors of special interests which lead to bad policy decisions such as we see in the U.S. and Europe.
6. We should not underestimate the power of the “rice paddy” work ethic in China.
7. Adding to China’s manufacturing dominance, the country has now become an innovator, having borrowed or stolen some of the world’s best technology from U.S. and Europe.
In sum, China will continue to export $18 billion worth of goods to Wal-Mart; China will continue to manufacture 2/3rds of the world’s shoes; produce more coal, steel and cement than any other country in the world; manufacture a majority of the world’s DVD players; continue to hold more foreign-exchange reserves than any other country in the world; and continue to grow its economy at 8-10% per year into the foreseeable future. With the U.S. economy expected to grow at 3.2%-3.7% this year, and the Chinese economy at 11%, foreign investment will continue to flood into China, and its emerging growth companies listed in the U.S. are likely to continue growing revenue and earnings in the high double digits. Investors would be wise to consider investing in the China small-cap sector. If you need some options, visit www.redchip.com