investing

3 Chinese Stocks That Are Better Bargains than Alibaba

Looking for a foothold in the Chinese market with dividends to boot? Consider this threesome.

All eyes are on Alibaba Group Holding (BABA) as the Chinese e-commerce giant makes its U.S. stock-market debut. Shares of the initial public offering priced at $68 apiece on Thursday. Alibaba dominates Internet sales in the world’s most populous nation, moving more merchandise than Amazon.com (AMZN) and eBay (EBAY) combined and serving up healthy profits. When the stock begins trading on Friday, it’s likely to change hands at more than 30 times Alibaba’s earnings over the past 12 months.

If you want to buy into the world’s second-largest economy without paying such a lofty price-earnings ratio, you have other options, though — particularly if you’re looking for dividends. You can choose from plenty of Chinese companies with a global footprint and a commanding presence in China itself that sell at far cheaper prices than Alibaba. (We include Taiwanese companies, as many Chinese mutual funds do, because of Taiwan’s close links to the mainland.) Many of these companies trade in the U.S. as American depositary receipts. Here are three that look appealing. (Prices are as of September 16.)

Taiwan Semiconductor Manufacturing (TSM, $20.48) is the world’s largest maker of computer chips, the components found in nearly every electronic device. The company dominates the high end of the chip market, says analyst Ahmad Halim, of S&P CapitalIQ, because of its industry-leading technology. Demand for semiconductors will rise, he says, as the smartphone business continues its explosive growth. Halim projects a 25% gain in sales in 2014 after an 18% increase last year. The company’s profit margins are particularly appealing: Its EBITDA, or earnings before interest, taxes, depreciation and amortization, is more than 60% of sales, and that figure could rise as it introduces new technologies, Halim says.

The shares trade at a modest 11 times estimated year-ahead earnings. Halim rates the stock a “strong buy,” with a 12-month target price of $27. He says Taiwan Semiconductor’s valuation should be at a slight premium to that of similar manufacturers because the company is more profitable than its peers. The stock’s sports a 2.4% dividend yield. (By contrast, the yield of Standard & Poor’s 500-stock index is 2.0%.).

More Chinese joining the middle class means more Chinese car owners. And China Petroleum & Chemical (SNP, $92.67), also known as Sinopec, will be there to benefit. It’s part of a duopoly that “dominates all facets of China’s domestic oil and gas sector,” says Morningstar analyst Zhao Hu. Compared with PetroChina (PTR), the other half of the twosome, Sinopec has “superior” refineries, Hu says. That’s because the facilities are larger and are located closer to the country’s economic hubs, cutting distribution costs, he says.

Investors chopped the price of Sinopec’s shares by 6.2% on September 15 after the company announced a sale of a stake in its gas-marketing operations at a price that was below analysts’ expectations. That helped bump up the stock’s dividend yield to a healthy 4.6% and left some breathing room below Hu’s $102-per-share estimate of Sinopec’s true value.

China Mobile (CHL, $62.08) is the world’s largest wireless telephone company, with roughly 800 million customers. It has signed them up despite what Morningstar analyst Ross MacMillan calls its “inferior” 3G technology, forced on China Mobile by its controlling shareholder, the Chinese government. Now, however, the company has launched 4G phones, and it expects to sell 88 million of them in the second half of 2014, up from 22 million in the first half. Expectations for 4G growth have pushed the shares to 52-week highs in recent days, over MacMillan’s fair value estimate of $54.

Analyst Ramakrishna Maruvada, of Daiwa Capital Markets, is upbeat about the stock. He believes subscription rates for China Mobile’s 4G services are accelerating past his previous expectations, and early results suggest that 4G customers are spending more on data services, driving up China Mobile’s average revenue per user, a key measure in the telecommunications sector. China Mobile’s shares yield 3.4%.

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