The Tycoon Report

Two Chinese Stocks Set to Multiply 20 Times Over

Tuesday, November 25, 2008 | Chris Rowe

Today I'll be brief and to the point, and I'll give you two Chinese stocks that can make you rich over the long-term.

PLEASE LISTEN TO ME! This is the time when Chris Rowe climbs to the highest roof-top and shouts the winning numbers to the lottery (and, inevitably, 99% won't listen!).

From mid-September through mid-October, we witnessed what was nothing short of the worst 30 days in global stock market history, with both U.S. markets as well as Asian markets losing 25% - 30% of their values. People are saying this is the worst market we have ever seen, second only to 1931. Perhaps part of the reason the market took such a beating is analysts' suggestions that this could be a mirror image to the economy of the 1930s. If you're a long-term buyer, that's an awesome ass-umption.  Why?

We are experiencing a massive global economic slowdown, sure. But this, if played right (or just not played 100% wrong) won't be anything like the Great Depression. The good news is Barack Obama sounds like he won't be as aggressive in his tax hikes as he said he would be (in order to get angry average Joes - who don't understand the dangers in that - to vote for him). I'm starting to like this guy more and more every day. The tax-hike talk scared the wits out of me.

Tax hikes helped bring the Great Depression to the forefront. The highest tax bracket was essentially doubled. (The government even taxed citizens on every check they wrote out!)

At the same time, the Smoot-Hawley Tariff raised U.S. tariffs on over 20,000 imported goods to record levels. The result was that many countries retaliated with their own increased tariffs on U.S. goods. That caused American imports to plunge by more than half and the export market subsequently collapsed. Some fear that Obama would impose trade barriers that would have an effect that would knock us into similar territory, but personally, I have more confidence in his ability to understand lessons of the past.

The bottom line is the market is trading as if we will go through the Great Depression part two, except that we won't. This is a long-term investors' best dream (censored for our family audience).

If you are a long-term investor, you should buy stocks that are down by a heck of a lot more than they will be over the next five years. Here are two Chinese stocks that are depressed, but have huge long-term prospects.

Focus Media Holding Ltd. (NASDAQ Symbol: FMCN) trading currently at $6.90. Headquarters: China

Here's a stock that's off its high of about $68.00 that's trading at $6.90. Did I mention that about $2.90/share is in cash? The company has no debt and the stock has a PE ratio of 4. Back out the cash and you have a business valued at $4.00 that expects to earn $1.17 in 2009 trading at a 70% discount to book value.

The stock got knocked down from $16.00 to $9.00 when they reported a quarterly profit that missed analysts' expectations, and forecast fourth-quarter results below estimates. Fortunately for long-term players, this caused a big panic in one of the scariest stock markets ever. (Like I said: "awesome!")

Analysts' earnings forecasts averaged 53 cents per share, but the company earned $51.3 million, or 38 cents per share. Total revenues grew 63.7% year-over-year, and it lowered forecasts for the fourth quarter.

Why did the stock drop by so much? You would have been scared too if you read what Tan Zhi, the CEO, said: "The macro headwind we are facing is the most severe in the modern history of the Chinese advertising industry."  But the company is buying back its own stock (as of Nov. 10, 2008, the company had repurchased approximately 1.6 million Focus Media ADRs in the open market under its previously announced share repurchase program). Management also owns 11% of the stock. In the same announcement, he said "We believe Focus Media is better positioned today than ever to face today's challenging macro backdrop." It's funny how investors focus on one part of the quote or another depending on whether we are in a bull or bear market.

CEO Tan Zhi also said "Advertising in the world's most populous nation remains a growing business. However, based on our discussions with our major advertising clients, we continue to expect there to be overall advertising market growth in China in 2009, as the Chinese economy will nevertheless grow but at a slower pace relative to 2008 and Chinese urban consumers will continue to grow in numbers due to continuing urbanization in major metropolitan areas."

Company description quoted from Yahoo Finance: Focus Media Holding Limited operates out-of-home advertising network using audiovisual digital displays in the People's Republic of China. Its out-of-home advertising network consists of commercial location network comprising LCD display network, outdoor LED billboard network, and movie theater advertising network; in-store network; poster frame network; mobile handset advertising network; and Internet advertising services network. The LCD display network includes flat-panel television displays placed in high-traffic areas of commercial office buildings, such as in lobbies and near elevators, as well as in beauty parlors, golf country clubs, shopping malls, automobile repair shops, banks, pharmacies, hotels, airports, and hospitals.

The next stock I'll talk about is one you're probably familiar with because it's considered China's Google...

Baidu.com Inc (NASDAQ Symbol: BIDU) trading currently at $115 13. Headquarters: China

This is the leading search engine for the Chinese market accounting for well over three quarters of market share. The stock is down about 315 points from its 2007 high of $430.

I don't have to tell you what it does - because it's the same thing as Google, so let's just focus on financials. The return on equity is 38% with zero debt. The 5-year earnings growth rate is 230% but the 2008 and 2009 earnings growth rate is estimated to slow to 88% and 39% respectively (which is normal for a company at this stage of its growth cycle). This is the king of the web in China so the company is well out of reach of competitors. It can be taken down just like Google (or anyone) can, but that would obviously take a LOT and it should continue to grow as China's internet using population will. 

Buying on the cheap...

Not only has the bear market helped to maul this stock's price, but unlike Google (who has a "do no evil" mantra) it has recently been accused of being evil. ("Awesome!")

For one, Baidu had been hit by music piracy lawsuits as well as allegations that it helped suppress news during this summer's tainted milk powder scandal that I talked about, in depth, in last week's Tycoon report on Chinese stocks. 

Recently, Baidu's paid-search listings included unlicensed pharmaceutical companies in its top bidders for medical keywords.  Just like Google, it has sponsored search results (ads) on right side, and in the main part of the page it has natural listings. Even in the natural results, unauthorized merchants are even outranking legitimate pharmaceutical companies. This caused the stock price to get cut in half from about $210.00 to about $110.00. 

So why am I recommending the stock? Because this will pass and life will go on. There will be bumps along the way, of course, but if you are a long-term holder of the stock, you can make several thousand percentage points on this stock over the years as more of China's population starts using the internet - PERIOD.

That's it folks. I hope you listen to me on what I've been saying for the last few weeks. Of course, these stocks can get cut in half. But if you buy them and hold them through the ups and downs (not watching them would make that easier), you won't care what happened between the time you bought them and the time you sell them. The stocks I've been recommending are fortune builders.

Click here to see past China articles.

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“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider