U.S. Slowdown Impact Felt In China

With the Beijing Olympics now more than half-way over, we wanted to get caught up with how the Chinese stock markets have been performing, especially in light of a slowdown in the U.S. market. Zacks senior analyst Paul Cheung, CFA was on hand with his thoughts.

Were there many surprises in quarterly earnings for Chinese companies under coverage?

By far most Chinese companies in my coverage performed as expected. Some Internet companies even announced results which exceeded the market consensus.

The slowing economy in the U.S. and now elsewhere has created a drag on many industries. Is China feeling the impact of this?

The slowing economy in the U.S. has resulted in a slowdown of the Chinese economy. In addition to the slowdown of the Chinese economy, high inflation rates have led to high pressure on earnings of Chinese companies. Among those, Internet companies should be in better position than other Chinese companies to grow their earnings.

What is your near- to mid-term outlook on companies you cover?

I am not quite optimistic on the near-term outlook on Chinese companies due to the slowdown of the Chinese economy and high inflation rate. However, I am optimistic on the mid-term outlook on Chinese companies because China’s economy will resume strong growth and keep inflation rate under control in the future.

If you have two or three top Buy recommendations at this time, which stocks would they be?

Baidu.com (BIDU) has more than 60% market share in Internet search market in China while Google has only less than 30% market share in China. As Baidu continues to expand product lines and gain market share, the company should continue to grow its revenue fast, even as China’s economy slows down.

Sohu.com (SOHU) is the Internet content sponsor of Beijing Olympic Games, which helps improve the company’s brand recognition and leverage the online advising opportunity in China. In addition, its popular online game continues to show strong growth momentum.

What should investors be mindful of before jumping into your industry?

Before investing into Chinese companies, investors should be careful of China’s economy growth rate and CPI level because these factors will affect the valuation and earnings of Chinese companies significantly.

Paul Cheung, CFA is a senior analyst covering the Chinese markets for Zacks Equity Research.

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