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.
, 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.
( 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.
, 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.
The shares have been on quite a run, up nearly 250% over the past year. Current valuations at first do look a bit lofty, as a middle-of-the-pack valuation score insists. At a trailing P/E of 50 and a forward P/E of 27, if the stock can continue growing at the nearly 37% compounded rate of the past three years, it could still be a good investment. Our model rates the stock a "buy" with an $83 price target.
( SNDA), a gaming stock, has suffered slowing earnings per share growth over the past two years. Still, earnings in the most recent quarter beat analysts' estimates. The stock has a low growth score (3.73 out of 10), driven mainly by depressed earnings over the past year, yet the market anticipates a 27% improvement in earnings through 2012.
Optimism is based on expectations for a strong product pipeline for 2011, which may diversify some of the revenue streams. The company also looks great from a solvency standpoint, with net cash on the balance sheet of nearly $1 billion (or $18/share). Our model rates the stock a "buy" with a $49 price target.
is probably the most recognized Chinese company. It's the leading online search engine in China and our fifth-highest "buy"-rated Chinese ADR. The stock has a $179 price target.
Baidu scores highest on performance (the stock is up 128% over the past year), efficiency (it has generated more income per dollar of capital than 90% of the companies we review) and solvency (very little debt, over $1 billion in cash).
Our model shows some hesitation based on the valuation of the stock. It currently trades at 90 times trailing 12-month earnings, and at 37 forward. If the company can continue to increase earnings at the three-year rate of 80%, the stock looks inexpensive at these levels.
Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser.
Stuart earned his bachelor�s degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.