Dual listings have caused quite a stir in Chinese stocks

By Genia Turanova
Emerging Investments

       The many classes of Chinese stocks resemble the alphabet soup of our childhood: A-Shares, B-Shares, H-Shares, even red chips. Those different types stem from various restrictions the Chinese government has established for its citizens and foreigners willing to invest in China. The most accessible (and the most liquid) stocks have always been the H-shares, representing companies incorporated in mainland China but listed on the Hong Kong Stock Exchange. Several Chindia( portfolio holdings, including CNOOC (CEO) and PetroChina (PTR), had the advantage of being Hong Kong listed. Now the big trend in China is dual listing. Trading both on the mainland and in Hong Kong, many of the biggest Chinese companies (with the government's permission) can now get the best of both worlds. This coveted dual-listing trend has sent many stocks rocketing higher, and for our recommended shares to hit our price targets in the process. In the month of September alone shares of PetroChina were up 28 percent while CNOOC was up 35 percent. The iShares China 25 Index (FXI) trailed a bit, gaining "only 20 percent for the month.
        At this point we're becoming more cautious towards Chinese stocks, as valuations are becoming stretched. This issue, we're following up on the sale of 51job (JOBS), which was done in a recent market update, with a sale of CNOOC and the iShares China 25 Fund. We're holding on to PetroChina because of its better reserve profile and higher yield, but we wouldn't be inclined to buy the shares here.
        If valuations return to more reasonable levels, we'll revisit CEO and FXI. For now, we're saying goodbye and "thank you" to them. We're also retaining China Mobile, as we believe its dominant market position justifies its current valuation.
        Despite our cutting back on our Chinese stocks, we still have good exposure to that market via other positions. One of the best all-around China investment ideas, as we've been pointing out since our very first issue, is no other that Australia's BHP Billiton (BHP), the world's biggest miner. The company owns a diversified portfolio of low-cost, long-life mining operations of all the commodities we expect to benefit from growth in China and India, including oil, copper, aluminum, coal, iron, uranium and even diamonds.
        BHP Billiton's stock has been having a good year, and for a good reason. Strong worldwide growth and a sustained uptrend in commodity prices, all good news for a diversified miner, helped the company report another set of record-breaking numbers. Among other company-specific news we would like to highlight an unexpected but very large upside to the resource base to its Olympic Dam mine in Australia. Trading at 14 times consensus next year's estimates, the shares are still attractive, and we continue recommending them with an updated target of $95.
        We're also adding a new recommendation to the portfolio. Yes, it's not a Chinese or Indian stock, but that doesn't make it any less exciting. Petroleo Brasileiro (PBR), or Petrobras as it is known, was founded in 1953 and based in Rio de Janeiro. This Brazilian government-controlled company is a leader in many areas of energy operations, including deepwater drilling and renewable energy including wind, solar, and biofuels.
        Reaching sustainable self-sufficiency has long been a goal for Brazil and for Petrobras. Today, to increase its performance in energies that contribute to sustainable development, Petrobras no longer works solely with oil; rather, it's an integrated energy company in the broadest sense of the world and it's a worldwide pioneer in renewable energy.
        Trading at a P/E of around 14, Petrobras is not a cheap stock - but it's far from being as expensive as CNOOC has become. A modest dividend of 1.7 percent also makes it attractive. We think the future of this stock will depend on the price of oil, and as we still expect that to go higher, we're comfortable recommending PBR for a target of $88.
        Editor's Note: Genia Turanova is Managing Editor of Emerging Investment, P.O. Box 97, Williamsport, PA 17703. 1 year, 12 issues, $129. www.emerginginvestments.net.