4 Chinese Stocks With Staying Power

By David Sterman

NEW YORK ( TheStreet) -- Shares of Chinese companies have risen and fallen in cycles during the past few years. But China's economy has been going only one way -- up.

Still, because of the law of large numbers, China's future economic growth is unlikely to be as impressive. But thanks to heavy investments in infrastructure, China is now well-equipped to handle a sustained period of solid economic growth -- perhaps in the 4% to 5% range. That's a rate we in the U.S. can only envy.

The key, then, is to look for Chinese companies that stand to do well over time -- that means companies focused on China's emerging middle class. As the ranks of the Chinese middle class swell, look for growing spending on health care, retail goods and tourism, along with advances in agricultural yields and energy efficiency.

Increased Travel and Tourism: With rising disposable income comes the urge to travel, and the Chinese are increasingly venturing out, either elsewhere in the country or throughout Asia. And they're increasingly using the Internet to research and book flights and hotels. But this is not yet a mature business. Less than 30% of the Chinese population is online, compared with more than 70% in countries such as Korea, Japan and Singapore, according to global communications firm Fleishmann-Hillard.

How large is the potential travel market? During the late-September, early-October holidays, 200 million Chinese are expected to hit the road (mostly to go back to their home region). That's two-thirds the population of the U.S. And according to analysts at Brean Murray, 10% of Chinese travelers now use the Internet to arrange travel plans -- roughly 20 million people. That figure is expected to rise to 60 million in 10 years.

Ctrip.com ( CTRP) is seen as the best pure play in the online booking industry and has considerable brand recognition in this fast-growing area. Web portal Taobao.com has vowed to overtake Ctrip.com eventually, but there's ample room for both of these firms to flourish.

The Ad Market Builds: Chinese consumers are bombarded with advertising pitches at every turn. But companies are realizing that the scatter-shot approach isn't helping to truly establish brands in consumers' minds, so they are turning to agencies that have more targeted ad campaigns tied in across several types of media. Sina.com ( SINA) has emerged as a leader. The company's range of tools, both online and offline, are considered to be innovative, which has enabled Sina.com to quickly build a large base of Chinese and foreign clients that are looking to get a foothold in China.

The market for Sina.com's services slowed earlier this year, and sales growth is expected to cool to about 10% in 2010. But recent results have been much more encouraging, leading analysts to expect a 20% rebound in sales next year. Over the long haul, investors should expect solid 10% top-line growth and more impressive bottom-line results.

Cars, Cars and More Cars: Chinese consumers have quickly grown to love their cars. And the nascent Chinese auto industry aims to capitalize on that demand and also eventually export to other markets -- if quality standards can be boosted. It's hard to find U.S.-traded shares of any Chinese auto makers, but Wonder Auto Group ( WATG) is a backdoor play, providing a wide range of auto parts to the big car makers. The company makes everything from alternators to seat belts to airbags. And as is the case with Deer Consumer Products, exports are also part of the picture, which explains why the car-parts sector has been growing even faster than the auto sector itself.

Water Treatment: China's water woes have been widely chronicled. The country's pro-industrial policies led to epidemic levels of pollutants being dumped into the country's major waterways. Regulatory efforts are finally starting to take root, but it will be many years before the water from major rivers is truly potable. But China is aggressively building filtration plants to at least clean up the dirty water so it is fit for consumption. The Chinese government is increasingly turning to companies like Duoyuan Global Water ( DGW). This company makes a range of filtration products, water softeners and ultra-violet sterilization equipment.

The shares plunged more than 40% on Sept. 13 when Duoyuan Printing ( DYP) owned up to some accounting problems. The two companies are unrelated except that they have the same chairman. As of now, Duoyuan Global Water simply looks guilty by association. If the company can avoid accounting troubles in coming months and auditors continue to give it a clean bill of health, the shares should move back up off current lows. More importantly, the company's products should see considerable demand for the foreseeable future.

Action to Take: These are just a few of the stocks that investors looking at China should be researching. In many respects, the theme is even more important than specific stock selection. China's economy has become too large to ignore, and many China-focused companies will see a long period of sales and profit growth. This article originally appeared on StreetAuthority. To read more articles from David Sterman on StreetAuthority, you can visit this link. Disclosure: At the time of publication, David Sterman owned no positions in the stocks mentioned.

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This article originally appeared on StreetAuthority, founded in 2001 by industry veterans Lou Betancourt and Paul Tracy. StreetAuthority is a financial research and publishing company with offices in Austin, Texas and Gaithersburg, Maryland. The company aims to help individual investors earn above-average profits by providing a source of independent and unbiased investing ideas.

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