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State Enterprises Look Attractive In China

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Emerging-market China has evolved into America’s banker, competitor, and in many ways, its copycat.

But while it appears that Sino-U.S. relations have never been more strained over so many business and trade issues, Standard & Poor’s believes that American companies and investors have come to accept that certain Chinese enterprises now present fewer risks and their shares will likely continue to appreciate. To balance the ups and downs related to short-term events with long-term investment opportunities, Standard & Poor’s helps separate the rice from the chaff with a group of select Chinese investments.

Investors can tap into China’s growing consumer base while minimizing risk by investing in a select few Chinese stocks that trade as American depositary receipts, advises Standard & Poor’s Equity Research. By investing in ADRs, U.S. investors overcome much of the transparency and information flow problems. Foreign companies that issue ADRs must demonstrate a high level of compliance with U.S. regulators in order to trade their shares on Wall Street.

“Chinese companies with ADRs must improve their investor relations,” said James McGregor, author of “One Billion Customers,” a new book on doing business in China. “They must become more professional and forthcoming in their communications with shareholders. That is the real answer to moving them from being speculative gambles to becoming solid investments.”

Standard & Poor’s analysts identified four Chinese equities ranked “buy” or “strong buy” for superior total return potential. They include two oil and gas producers — CNOOC Ltd. (CEO) and PetroChina Co. Ltd. (PTR) ; and two telecom companies — China Mobile (Hong Kong) (CHL) and China Netcom Group (CN). The Chinese government is a significant shareholder in all four companies.

McGregor also likes these stocks. These four companies “are all big state entities that dominate their sectors in China, so they are likely to be steady bets for the investor because their performance will generally track China’s overall economic ups and downs,” he says.

Lorraine Tan, a Singapore-based Standard & Poor’s equity analyst who covers CNOOC and PetroChina, believes that both energy concerns should benefit from higher oil and gas prices. Tan believes that their growth is likely to be spurred by the Chinese government’s “encouragement of the oil and gas sector.” She also likes that they both pay a dividend. In Tan’s view, disclosure is improving for companies like CNOOC and PetroChina.

David So, a Hong Kong-based Standard & Poor’s equity analyst, sees benefits for China Mobile Hong Kong and China Netcom, due to consolidation and restructuring of China’s telecom industry. Interestingly, these changes may actually pit his two favorite picks against each other as they vie for mobile communications market share.

Contact Bob Keane with questions or comments at: [email protected].