Huge Reforms in China Could Lead to Big Upside for Top Chinese Stocks

Last Friday the Chinese government unveiled a 60-point reform plan designed to boost Chinese economic and social status to new levels. The agenda is an initiative to move China to a more free market economy. They want to reduce the power of the giant state-owned companies, remove price controls, phase out caps on interest rates and make the currency, the yuan, more flexible and convertible. Good news for Chinese business and the citizens may also be good news for investors here at home.

Investing in China has always had a large share of critics. Hedge fund manager Jim Chanos, the founder and president of Kynikos, has been a long-time perma-bear on investing in China. He cites everything from lack of transparency to currency manipulation to outright lying on behalf of Chinese companies. While he has had some success, the collapse of the Chinese market has yet to materialize.

Deutsche Bank has done a huge research drill-down on the changes to come. They highlight the top stocks to buy that trade on American exchanges and can be bought by investors. The new reforms and changes may offer some of these top stocks to buy a huge lift going forward.

Baidu Inc. (NASDAQ: BIDU) has become a momentum investor’s dream stock. The “Google of China” has almost doubled since last summer and continues to see market share gains in China. The company may be able to expand into Internet banking and telecom services. The Thomson/First Call price target for the stock is $185. Baidu closed Monday at $162.87. International Ltd. (NASDAQ: CTRP) together with its subsidiaries, provides travel service for hotel accommodations, airline tickets, packaged tours and corporate travel management in the People’s Republic of China. The company is expected to benefit from improved infrastructure in the Internet to support growth in usage. The consensus price target for the stock is $64. Ctrip closed Monday at $51.55.

Youku Tudou Inc. (NYSE: YOKU) reported tremendous earnings last week. The company’s revenue clocked in at $140.2 million, just ahead of Wall Street’s expectations and up 55% on a pro forma basis. The dot-com speedster still is not profitable, but narrowing deficits down to a $0.21 per American Depositary Share (ADS) loss continue to point the stock in the right direction. The consensus price target for the stock is posted at $28, but the stock closed Friday at $30.05

Sina Corp. (NASDAQ: SINA) is another top name expected to benefit from telephone deregulation. The company just completed a successful sale of US$700 million in convertible senior debt. The company plans to use $100 million of the net proceeds from the offering to concurrently repurchase its own outstanding ordinary shares. The remainder of the net proceeds of the offering will be used for general corporate purposes, including working capital needs and potential acquisition of complementary businesses. The consensus price target for this top stock to buy is $94.50. Sina closed Monday at $82.61.

Mindray Medical International Ltd. (NYSE: MR) is another top Chinese company buying back stock. Under the program, Mindray, which is a leading developer, manufacturer and marketer of medical devices worldwide, is authorized to repurchase up to US$200 million worth of its issued and outstanding ordinary ADSs on the NYSE Euronext at prevailing market prices from time to time over the next nine months. Investors receive a 1.2% dividend. The consensus price target for the stock is $38.50, but Mindray closed Monday at $39.03.

NetEase Inc. (NASDAQ: NTES) hopes to attract loyal mobile customers via a newly launched chatting app, YiChat. That app is a “good entry point” into mobile before NetEase begins launching games, acting CFO Onward Choi told analysts on a conference call last week. The consensus price target for the stock is $77. NetEase closed Monday at $67.50.

SouFun Holdings Ltd. (NYSE: SFUN) reported operating net earnings of $1.13 per share last week, 31% above the Zacks consensus estimate and 66% ahead of the year-ago earnings. The outperformance was driven by a sturdy top line that improved 45% year over year. The revenue increase, in turn, was fueled by increase in listing services and SouFun membership e-commerce services. Investors are paid a 3% dividend. The consensus price target for this top Chinese stock to buy is $63. SouFun closed Monday at $66.53.

While bears will continue to be on the prowl on China, the top stocks to buy have traded here for many years and have made many investors very happy. The new reforms may have just the effect for investors that the bears have been concerned about. Increased transparency, better bookkeeping and less government interference and regulation may be just the fuel to light these stocks’ fires.

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