Picking oversold Chinese stocks is a difficult task, considering that China is in the bust phase of the business cycle. The fundamentals driving that — a stagnant Chinese yuan supply after years of extreme expansion — have not changed. Chinese stocks may have a while yet to fall before reaching bottom, but that doesn’t mean every single Chinese company is doomed to see much lower share prices from here.
China has had by far the most inflationary monetary policy of any major economy since 1996. The money supply has been inflated 22 times over since then. When that stops, almost everything falls. The only stocks that can escape the avalanche are ones that are either far toward the consumer end of production or else dependent on global market prices like commodities, and therefore less affected by fluctuations in the national economy.
Here are five that have sold off, but mostly independently of the current bust phase of the present Chinese business cycle. When the markets underpinning these companies reverse, so will these shares, independently of when the current cycle in China bottoms.
This Chinese oil and gas explorer is skirting six-and-a-half-year lows. CNOOC Ltd. (NYSE: CEO) offers a very high dividend of $6.45 a share with a nice yield of 6%. If you keep it long term, the dividend should protect against further loss in case the commodity markets are not done bottoming yet. CNOOC has debt but not extreme amounts of it, only 45% of the market cap, and its market cap is much smaller than usual. The Chinese mini-crash has exacerbated the decline here, but shares should reverse when energy prices tick back up globally.
A similar story to CNOOC, China Petroleum & Chemical Corp. (NYSE: SNP) has even better finances, lower debt to market cap, and a better looking long-term technical chart. While CNOOC has been in a downtrend since 2011, China Petroleum has not. Also, if you take a look at the long-term price action, the stock has a propensity to reverse on double bottoms. It looks we have one now at around $60. There is also a 4.5% dividend yield at current prices.
One more pick in the energy sector: PetroChina Co. Ltd. (NYSE: PTR) is a bedrock Chinese mega-cap skirting its 2008 lows. Debt is quite a bit higher for this company than its peers, and its dividend is lower, but once again it is not primarily China’s current business cycle bust that is bringing PetroChina to 2008 lows. It is depressed energy prices only exacerbated by macroeconomic conditions. In any case, PetroChina going much lower than its 2008 lows would make very little fundamental sense given that it is a much bigger, more successful company now than it was back then.
Unlike an energy play, which is a bet on rising commodity prices, Huaneng Power International Inc. (NYSE: HNP) is more a bet on price inflation. Electricity bills go up as price inflation rises, and Huaneng Power thrives on high electricity bills. Given China has had the highest monetary expansion of any major economy, strong price inflation is almost a given at some point. The company has become more efficient over the past three years, with gross profit increasing and earnings increasing despite stagnant to falling revenues. It offers a decent dividend, and the Chinese mini-crash has only made a small dent in its uptrend. The drawback here is high debt, so interest rates need to stay low or it will have to pay back its debt fast, which will hurt its bottom line.
Tsingtao Brewery has definitely been affected by the mini-crash, unlike the other four on this list, but possibly not much longer. Who hasn’t had a Chinese beer? Maybe not the best cold one you’ve ever downed, but beer is beer, and people drink it regardless of what the PMI is. Tsingtao has stable finances, and it is touching long-term support. Sharply toward the consumer end of the spectrum, it should be insulated from major further downside due to an ailing economy. Before diving into this beer company, it would be wise to make sure the bottom at $21.65 holds though.