BOSTON (TheStreet) -- About a dozen Chinese stocks trading in the U.S. are playing growing roles in mutual funds as the economy of the world's most populous nation booms.
Energy, Internet and technology companies are the most widely held Chinese stocks. They're bought and sold as American Depositary Receipts (ADRs).
That's because of investors' recognition that China's rapidly growing economy and living standards are resulting in increased demand for electricity and gas, while its expanding middle class is eager for more Internet and telecommunications services.
Internet-services stocks are the most popular.
, the Chinese-language equivalent of U.S. search engine
, has 54% institutional fund ownership, about half that from mutual funds, including
T. Rowe Price
funds' 4.5% stake.
, the leading Internet portal in China with seven branded Web sites, has 70% institutional ownership, about half of that made up of mutual funds, including a 6.1% stake owned by the $23 billion
Oppenheimer Developing Markets Fund
Many other Chinese companies trading on the Hong Kong market, and with huge market values, are being sought out by several large, region-focused U.S. funds, but they remain under the radar of most individual investors since Wall Street analysts don't provide coverage. Still, more Chinese companies now meet U.S. accounting and regulatory standards.
Morningstar stock analyst Allan Nichols said the allure of Chinese stocks is the nation's annual economic growth rate of about 10%, about three times that of the U.S. As growth has slowed in the U.S. and Europe, investors have cast a bigger net and so are making allocations to markets that previously were considered dubious for political reasons or because of a lack of financial transparency.
"The risk in China is a lot less than it used to be," he said. "It's higher risk than in the U.S., but it's certainly nothing like it was 10 years ago," so investors are saying, 'China's been growing like crazy, let's get on the band wagon.' "
But he cautioned that individual investors should best take a long-term perspective when buying many of these stocks since they have appreciated so much recently. "These stocks are pricing in a lot of growth. We think short-term, most of them are overvalued," but given the growth prospects of their markets, they could potentially realize significant value over time.
China region mutual funds are about break-even this year, losing an average of 0.03% in the first quarter, but over the past 12 months, they're up 15%.
that are popular with professional U.S. investors:
is the leading Chinese-language online search company. It is expected to benefit from advertisers' increased spending on paid searches as they seek to optimize their budgets via effective and measurable marketing results seen over the Internet.
It is also seeing rising adoption of paid searches among small and medium-sized businesses, the main target market.
A recent S&P analyst's report said Baidu is "one of China's digital bellwethers, with significant momentum and opportunity in varied areas, including search, advertising, video, applications and video."
But it cautions that "despite strong recent execution, we see risk associated with regulatory/legal issues related to issues including piracy and privacy."
Its shares rose 43% in the first quarter and 131% over the past year, to $137.80, giving it a market value of $46 billion.
Standard & Poor's analysts downgraded Baidu shares on March 31 to "hold" from "buy," noting its shares are "fairly valued." But it is keeping its 12-month price target of $160.
S&P projects revenue increases of 68% in 2011 and 45% in 2012, "reflecting growth in the Chinese Internet search segment, benefits of new technologies such as the Phoenix Nest advertising platform and expansion into new areas."
For fiscal 2011, analysts estimate that Baidu will earn $2.48 per share and that will grow by 47% in 2012 to $3.64 per share.
S&P says that it found nine "buy" ratings, 12 "buy/holds," two "holds," two "weak/holds" and one "sell" in its review of analysts' ratings.
, China's third-largest oil and gas company, focuses on exploration and production of oil and natural gas off shore from China. International operations take place in Indonesia, Nigeria and Australia. Oil and gas sales contributed 80% to 2009 operating revenue and marketing about 20%.
Morningstar analysts write that "a domestic market hungry for energy and an advantageous regulatory position provide CNOOC with continued promise."
analysts said in a March 30 research report that it has a "buy" rating on its shares and raised its price target 15% because of the prospect of higher oil prices worldwide, which will boost CNOOC's earnings. It estimates that for every $1 increase in the market price of a barrel of oil, CNOOC will get a 1.3% increase in its "bottom-line earnings per share."
Standard & Poor's gives it a "hold" recommendation and a three- star rating out of a possible five based on share-price valuation. It says: "CEO's growing oil output, above-average return on capital and low relative upstream costs remain key attractions," but its shares have exceeded its 12-month price target of $244.
CNOOC's shares, now at $262.70, have appreciated 6.1% this year and 15% over the past year, giving it a market value of $110 billion.
CNOOC is the largest holding, at 4%, of the $2 billion
Fidelity China Region Fund
, and second-biggest of the $2.8 billion
Matthews China Investor Fund
, at 2.9%.
S&P says the company has a huge safety net. "Our view (is) that there is an extremely high likelihood that the government of the People's Republic of China (PRC) will provide sufficient and timely support in the event of financial distress."
is a leading Internet media company in China. As a provider of reliable online news and information, it has attracted a well-educated and relatively wealthy user group, demographics that make it a particularly appealing venue for advertisers. The firm has more than tripled its revenue over the past seven years.
Sina generates about 70% of its revenue from online advertising, with the rest coming from wireless value-added services.
Its shares are up 56% this year and 184% over the past year, giving it a market value of $6 billion.
ThinkEquity analysts have a "hold" rating on its shares and said in a March 18 research note that it thinks its shares are now fully valued.
Morningstar analyst Dan Su said in a March 24 research note that Morningstar has the company "under review" to reassess its operating valuations.
The company recently said it dropped the
search service from its Web site and is now using its own search technology. Google has said that it would phase out its censored search contracts in the country.
The company also owns Sina Weibo, a Chinese micro-blogging site similar to Twitter. It was launched in August 2009 but is still under development.
ThinkEquity says it has cut its earnings per share estimates for 2011 by 16% to $1.67 per share and by 13% in 2012 to $2.10 per share, "as we now assume a greater level of investment for Sina Weibo as Sina aggressively builds out the platform as well as marketing of Weibo. We believe the investments in Weibo are the right strategic move for Sina, though we believe shares are currently fully valued."
Fidelity owns 9% of Sina's shares, followed by T. Rowe Price, at 8%. Institutional investors own 91% of the company's outstanding shares.
provides wireless voice and value-added services through networks covering mainland China and a substantial part of Hong Kong, and ranks as the largest mobile carrier in the world, with 575 million subscribers at the end of October. The total population within China Mobile's service area is 1 billion.
In January 2009 it also started offering 3G wireless services on the GSM standard, a digital system dominant in Europe and many other areas worldwide. The company also has a 20% stake in Phoenix Satellite Television as it seeks to develop its value-added services.
Standard & Poor's, which has its shares rated "hold," with a $53 price target, said in a March 26 research note that "we believe emerging-market risk for (the company) is offset by its strong cash flow generation and balance sheet and its market leadership position in China's wireless industry."
"China's wireless penetration rate reached 58.4% in May 2010, up from 50.7% a year earlier," S&P said, which compares with the more than 90% penetration rate in the U.S., leaving room for continued growth among wireless providers in the Chinese market.
Standard & Poor's found one "buy/hold" and one "hold" rating among analysts. For fiscal 2011, analysts estimate that CHL's earnings per share will grow 3% to $4.31.
China Mobile's shares are down 6.8% this year and 0.4% over the past year, giving it a market value of $185 billion.
Only 1.6% of its shares are owned by institutional investors, and there is less than 1% mutual fund ownership.
Huaneng Power International
is China's largest independent electricity producer.
Morningstar analysts say that "despite the global recession, the country's electricity usage continues growing at double-digit rates, and we expect it could outpace China's long-term economic growth."
The company benefits from long-term contracts that guarantee certain levels of business several years into the future.
Morningstar said it thinks the company has significant growth potential because the firm's power plants serve the more developed eastern portion of China, where electricity demand is consistently stronger than in other regions.
It also has a unique, protected position from competition, given the Chinese government's majority stake in the company. "Obtaining approval to build -- and sometimes, even, to acquire -- a power plant in China has traditionally been an onerous process," said Morningstar. "But Huaneng's relationships with the central and local governments have helped shield its power plants from significant competition."
Citi Investment Research & Analysis, which has a "buy" rating on its shares, and said it expects the company's shares have a 11% appreciation potential and the company pays a 3.7% dividend, giving it a potential 15% potential return.
Its shares are up 9.9% this year and 5.8% over the past year, giving it a market value of $7 billion.
Wellington Management owns 2.6 million of its shares, or 0.14% of the outstanding shares, making it the largest institutional investor.
is the biggest oil and gas producer in the People's Republic of China. About 87% of its shares are state owned by China National Petroleum.
The company reported 2010 net income rose 35% from a year earlier to $21.3 billion, helped by a 29% rise in average crude-oil prices in the period.
Standard & Poor's has a "strong buy" recommendation on its shares and gives the company its highest rating of five stars. It recently raised its 12-month target price to $180 from $155. It was trading at around $155 on Friday.
For fiscal 2011, analysts estimate that PetroChina's earnings per share will grow 20% to $13.93 per share.
Analysts give the company one "buy" rating, one "hold and one "weak/hold," according to S&P.
Morningstar says "PetroChina can access resources in countries with the assistance of the Chinese government that otherwise would not be politically accessible to other companies." That includes exploring natural gas fields in Colorado and Canada for new drill sites. It has budgeted $2.7 billion for capital expenditures this year in an obvious effort at building its production capabilities.
Shares are up 16% this year and 33% over the past 12 months, giving it a market value of $266 billion.
Despite that market value, only 0.7% of its shares are owned by institutional investors and about half that is made up of mutual funds.
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