Worried About China? 3 Safe Bets - Analyst Blog

Chinese stocks trading in the U.S. plunged to a five-week low last Thursday, with Baidu, Inc. BIDU leading the pack. The country's largest Internet search engine fell to its lowest point in a month. The Bloomberg China-US Equity Index lost 2.7%, falling to 96.49. The Ukrainian crisis and disappointing economic data were blamed as the major reasons for this slump.

Dismal Economic Data

According to figures released this month, the official Purchasing Managers' Index declined to its lowest level in eight months in February. At 50.2, the figure was lower than January's reading of 50.5.

Figures released last week were in keeping with this downward trend. Combined industrial output for January and February increased 8.6% on a yearly basis. This is the lowest start to a year in five years. Meanwhile, retail sales for the same period increased 11.8%. This is the most sluggish pace in nearly a decade.

Currency Reform

Tensions regarding the Ukraine crisis subsided after a weekend vote in Crimea ended peacefully. Moreover, ‘modest' economic sanctions on some Russian and Ukraine officials did not affect investor sentiment. Consequently, investors pulled out of the Yen, which is viewed as a safe haven. This was also in keeping with the weak Chinese economic data released recently.

But the extent of its decline, a fall to an 11-month low was also a result of the epochal broadening of the currency's daily trading band. Last Saturday, the People's Bank of China expanded the daily trading band for the Yen from 1% to 2%.

This is being viewed as a move to discourage speculation, a result of a continuous appreciation against the U.S. dollar. This will also go a long way to liberalize the country's current account and increase international exposure.

Pangs of Change

In fact, this is one of a series of reforms being carried out by the Chinese government to reduce structural problems. These include widespread pollution, corruption and vice. Other measures are aimed at reducing local governmental debt and dubious banking practices.

However, these measures have also reduced consumption, and affected sectors such as cement and steel. Meanwhile, the government has fixed its growth target at 7.5% for the year, considerably lower than the double digit figures achieved over the last thirty years. However, Chinese Premier Li Keqiang has said job growth and environmental issues will take precedence over headline growth going forward.

Slowdown, Not a Recession

Several analysts have suggested that given the economy's inherent strengths such as large new private savings, low inflation and massive foreign reserves, it is unlikely that soft data suggests anything more than a moderation of growth. This allows the government enough room for further intervention if required.

Below we present three China stocks which possess the potential to grow appreciably, each of which also has a good Zacks rank.

Noah Holdings Ltd.

Noah Holdings NOAH operates in the wealth management space, catering specifically to high net worth individuals in China. Noah Holding conducts its operations via Shanghai Noah Rongyao Investment Consulting Co., Ltd which handles the bulk of its business. The company's insurance brokerage operations are carried out by Shanghai Noah Investment Management Co., Ltd.

Noah Holdings Limited holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 115.90%. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 12.87.

SouFun Holdings Ltd.

SouFun Holdings SFUN owns and operates real estate, home furnishing and home improvement websites in China. These websites offer ecommerce, listing, marketing and other real estate related services in China. The company has around 100 offices catering to local customers. Its primary website www.soufun.com offers information on real estate for over 320 Chinese cities.

Currently, the company holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 66.70%. It has a P/E (F1) of 19.57.

JinkoSolar Holding Co., Ltd.                                 

Our third choice is JinkoSolar Holding Co., Ltd. JKS. The company manufactures products related to solar power. These products span the complete value chain, from recovered silicon materials to solar modules. JinkoSolar caters to both domestic and foreign markets. Its major products are solar modules and cells as well as silicon wafers.

Apart from a Zacks Rank #2 (Buy), JinkoSolar has expected earnings growth of 110.70 %. It has a P/E (F1) of 9.14.

Though the near term outlook may seem far from optimistic, China remains an attractive investment destination. These three stocks can leverage the country's strong fundamentals and would make good additions to your portfolios.