5 Highest-Rated China Stocks

BOSTON (TheStreet) -- Many investors stay away from Chinese stocks, preferring funds instead, as scandals dog smaller companies from the world's second-largest economy.

Many investors have asked me for recommendations of highly rated Chinese companies. So I ran a screen of companies based in China with American Depositary Receipts (ADRs) trading on U.S. exchanges. Here are the results for TheStreet Ratings' five top-ranked Chinese stocks based on a quantitative equity model.

NetEase.com (NTES), an online gaming company, leads the pack with a 7.3 overall rating, a "buy" recommendation and a $56.60 target. The stock has achieved our highest reward grade of A+, which measures growth in revenue, earnings and cash flow, along with stock performance/momentum and overall efficiency (or return on equity and capital).

NetEase's stock scores below average in regard to risk (C+), which has kept the overall stock grade at A-. While the solvency of the company looks great (NetEase has nearly $11/share in cash), the volatility of the stock has held back the risk score.

NetEase also has a solid valuation score, which measures ratios such as price-to-earnings and price-to-book. At a trailing P/E of 19 and a forward P/E of 13, the stock looks attractive, considering the company has been growing revenue at a 30% annualized rate for the past three years. With analysts expecting an average of 15% earnings growth over the next year, the stock looks fairly inexpensive with a PEG (a measure of earnings growth) ratio of just 0.87.

Simcere Pharmaceutical (SCR), a generic pharmaceutical manufacturer, is the second-ranked Chinese stock, with a 5.9 overall rating, a "buy" recommendation and a $16.76 target. The stock has a reward grade of A-, and a risk grade of C, leading to an overall stock grade of B.

Simcere's highest scores are on performance (this stock has surged by 49% over the past year) and efficiency -- the company has generated more income per dollar of capital than 70% of companies we review.

51JOB Inc. (JOBS), which runs an online-job portal, has benefited from a booming economy. The company reported significant earnings per share improvement in the most recent quarter. With respect to growth, the company scores better than 70% of the stocks we rate.

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