Made In China

Ok.  I know I have lost money in Chinese stocks.  There was out-and-out fraud in 2011 and 2012 on many reverse merger stocks.  Many fell into my screens and I did buy some and lost money. I have moved on.  I bought my first Chinese stock since that fiasco, GA.  I think they are terrific.  So I will consider buying another in my upcoming tranche.  Let us see what the top-rated ones are and open their (errrrr) Kimonos?

Ticker	Rank	Date	Stock Price	Market Cap	Earnings Yield	ROIC	Yahoo Yield
RDA	1	5/4	9.64	463	16%	328%	12.5%
CYOU	2	5/4	28.13	1,503	26%	171%	13.5%
GA	3	5/4	7.66	1,869	13%	361%	0.0%
NTES	4	5/4	57.33	7,531	12%	462%	1.8%
GAME	5	5/4	2.91	819	36%	68%	0.0%
SPRD	6	5/4	20.61	1,086	10%	145%	1.9%
NTE	7	5/4	8.59	393	39%	52%	5.5%

So GA still ranks very high.  Let us see how they compare to the other options.

RDA - this is a semi-conductor manufacturer in Shanghai.  Their income statement looks like something out of Finance 101 of what you would like.  In 2008 they have revenues of 55m and now at end of 2012 they are at 391m.  Margins have eroded a bit, from 18% to 16%. In past year their cash dropped from 142m to 117m.  Both still solid versus a 463m market cap.  It looks to me like they bought something, perhaps another company as they now have $64m of intangible assets. Six analysts think they will make $1.50 in 2013.  Pretty strong for a $9.64 stock, so you can see why they are ranked highest.  Having been burned, I'd suggest you want to know more about the analysts and auditors.  Analysts include HSBC (respectable), Canaccord Genuity, Needham, Credit Suisse, Morgan Stanley, UBS and DA Davidson.  They are audited by PWC.  Everything seems to suggest they are a real company (certainly a real concern).  One thing I look at is interest income, to see if it makes sense against cash held.  In 2012 it was $4m, which seems reasonable for a firm that started year at 142m of cash and ended at 117m. The 2011 year seems light at $2m. Hmm, they did also pay a one time special dividend of $1.20 a share.  That is pretty chunky (may also explain cash drop) and gives me more confidence that they are a legitimate company.  I gotta say, I am tempted to put on my list.  Let us look at other choices.

CYOU - This is a Beijing online gaming company.  They are owned in part by Sohu, who I am pretty darned confident is a legitimate company.  I will check a few of the facts, but I think CYOU will pass the smell test.   Hmm, having a little trouble pulling from Fidelity.  Let us look at Yahoo. Revenues have grown sharply in past two years, from 354m to 623m. As you might expect, online gaming is a high margin business.  Certainly you can get economies of scale.  Their margins have interestingly declined in past three years from 63% to 56%.  Still very good.   The increase has come from Cost of Revenue increases (33m to 104m), not sure if this is advertising?  Having to pay for servers etc?  Also their research costs have increased. I get that as you always have to be developing new games and new versions. I calculate they have $350m of excess cash versus a $1.5b market cap (big company).  They made about $15m in interest income, feels about right for 500m in cash.  They did pay a special $3.80 dividend.  That is a lot of cash, so I think we can be confident this is a legit company. They just announced 1st quarter figures, $1.45 per share.  All I can say is wow.  This is a stock under $30. They increased revenues 2% quarter over quarter and 30% year over year.  It looks like they are saying Q2 will be pretty steady state with 1st quarter.  These guys are just a cash machine.  That is why I get an earnings yield of 26% (essentially inverse of P/E ratio with excess cash stripped out, which makes it a p/e around 4).  I guess the concern (beside being a Chinese company) is the Moat.  New games can come.  But there is a learning curve on new games.  You have friends and teams on games you know and love.  I played a baseball online game for many years and enjoyed camaraderie... never looked at replacement games.  I think I have to rank high as well.  Maybe I will end up buying 5 Chinese stocks... (doubt it).

GA - this is the stock I own.  It has been on a great run.  If you had bought just a year or so ago you would have doubled your money. Pretty much same song second verse with CYOU.  It is definitely "pricier", though by most metrics still quite cheap at 13% earnings yield. Hmm, very strange.  I would have bet a lot of money that GA had higher revenues to CYOU (higher market cap); but it ain't even close.  Lats three years have gone from $202m to $345m (CYOU is $623m, I think we can see why they have 2x earnings yield... they have 2x revenues).  Interestingly, GA has done what I expected to see at CYOU.  They have increased their margins with the higher revenues, from 59% to 63%.  Probably explains the CYOU discount.  Of course the flip side is that CYOU now has more room to expand their margins... CYOU is spending more on research: 73m to $52m.  On the kicking the investment income tire, GA made $17m on about $430m in cash.  Pretty decent.  GA paid a 30 cent dividend last year and is about to pay 40 cents here in May.  I don't know, I came into this thinking I would clearly show that GA is better than CYOU, but not so. One point worthy of mention on CYOU is it looks like their is a 5% minority interest. I assume this is Sohu.  So as a shareholder, you do have to multiply their figures by .95, but they are still strong.

NTES - Similar to CYOU and GA; except these guys are huge.  A $7.5b market cap.  Who knows, they might try to buy one of the smaller ones.  Pretty similar story, have grown revenues from 834m to $1.3b in past three years.  They have also seem margins contract from 54% to 48%.  You would think their size would make that less likely.  Against their 7.5b market cap, they have a whopping $2.3b of excess cash!  These guys own printing presses!  Y'know, I was tongue in cheek about buying a competitor, but with all that excess cash, why not? It should be accretive.  They spent 115m on research, so on a relative basis CYOU seems to spend a lot... does that mean better future revenue streams?  I am not going to dig any further.  Nothing wrong with NTES, I just don't find them as attractive as first two.

GAME - Yes, another online game company.  This one will be short.  their revenues are declining.  They do not have as much excess cash.  They are the cheapest (36% earnings yield) and they spend a lot (108m) on R&D.  If they have something in pipeline... maybe.  But too hard to know fer sure.  I gotta believe a declining revenue stream is a very bad sign in a market that should be vibrant.

With that I am going to stop as I want to take a jog.  I think CYOU is on my almost definite list.  I am going to have to think long and hard about 2 Chinese companies, but RDA looks pretty tempting as well and they seem legit given who is covering them and who is auditing.