Doubling your money is old news. What I'm interested in now is an easy triple. That's why I'm looking at three Chinese companies that meet Warren Buffett's criteria for investment. I think they are likely to triple in value over the next year.
The three criteria I'm borrowing from Buffett's book are that the company is highly predictable in metrics such as revenue and net income, that it has growth potential and that its stock is priced cheaply.
The three Chinese stocks that I think follow these criteria are American Oriental Bioengineering (AOB), Xinyuan Real Estate (XIN) and E-House (EJ).
Criteria 1: High predictability. Predictability in key company metrics such as revenue and net income indicates good management.
American Oriental Bioengineering has been increasing net incomes rapidly, and the concern is that management is diluting shareholders' earnings. Have no fear. AOB is using its liquidity to expand into its niche market and grow into new markets. This company grows predictably not only on an annual basis but also on a quarterly basis. It's been growing quarterly with a regression coefficient of 0.981. Net incomes are highly related to the revenues in this case as well, and this company is growing exponentially in a seasonal fashion. (See the charts below.)
As for meeting criteria 2, headlines such as "American Oriental Reveals Huge Acquisition in Q2 Report" scream growth potential. Analysts have this one underestimated with growth of 31%.
Criteria 2: Future Growth Potential.
Xinyuan recently won an award from the China Real Estate Top 10 Committee for being one of the top 100 Chinese real estate companies with the greatest growth potential. The company forecasts growth of 45% to 68%.
Xinyuan Real Estate's 2007 real estate breakdown is as follows: 42% under planning, 30% under construction and 28% completed. So far the company has completed 14 projects, including three in 2007, and has seven under construction and six in planning stages. Xinyuan is focusing its efforts on Tier 2 cities that have not been losing value as the Tier 1 cities have. The company is forecasting growth of about 70% for 2008 compared with 2007.
Lately, Xinyuan has had weak earnings. For such a company, earnings are not expected to be predictable on a quarterly basis, so there's no reason to sell. Look to the annual figures. Annually for the past four years, the revenues have been doubling, and the net incomes have been tripling. Meanwhile, the stock price has been plummeting, maybe due to the "negative EPS" that should be overlooked because it is all due to a one-time shareholder expense of going public. In fact, with the price of the share under book value, there's a significant reason to buy. Even at a meager 20% future growth rate, this stock should be priced at $17. Check out its 2007 Annual Report.
Criteria 3: Cheap Price
What I see in the below table is three companies priced to do nothing even though they've been exploding. Analysts have them easily beating these intrinsic growth rates. Doubling isn't enough.
E-House, which provides real estate agency and brokerage services, just announced a share repurchase plan and is another company that has been dogged because of the Chinese stock market slump. I recently came across this one while watching a corny video of James Altucher hiding in a construction zone explaining that SPDR S&P 500 ETF (SPY) and E-House are his secret stocks. Marketing is everything, and E-House has the home-field advantage for Chinese real estate services on this one. It boasts being a one-stop shop for real estate services. The National Association of Real Estate Brokerage and Appraisal Companies named E-House "China's Best Company" in 2006. E-House is expected to grow at about 43%. I'm going to enter this door while everyone else appears to be leaving it. But they'll be back.
So there you have it: three Chinese stocks that should triple and meet Buffett's basic criteria for company purchases. When you have companies such as Xinyuan that are priced below book value, you'll have investors making asset plays driving this stock up quicker than its peers.
You can see more of my ideas at GlenBradford.com
At the time of publication, the author owned AOB, XIN and EJ.
