3 must-own China stocks

China is a hot spot for investors. But you have to know the company you're buying and the fundamental reasons why it will make money.

By InvestorPlace Nov 11, 2009 5:16PM
China © Digital Vision/SuperStockBy Robert Hsu

China is rife with opportunities for investors today. The question is, which are the best stocks to buy now?

To answer that question, I like to visit the companies myself, to see first-hand how they operate, what their strategies are, and what will make them profitable -- or not.

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Here are three of my top China stocks to buy now.

China Stock #1 - Baidu

Baidu (BIDU) is China's premier Internet search engine, the Google (GOOG) of China, if you will.

Recently, Baidu gave what some analysts called a less than stellar earnings outlook. Despite reporting a 42% leap in third-quarter profit over the same period a year earlier, Baidu said it expected a “temporary negative impact” on fourth quarter revenue, as it completes the transition to its new online advertising system.

Now this new advertising system may well come with growing pains, but it certainly doesn’t alter the fundamental growth drivers for Baidu over the long term.

China has the world’s biggest population of Internet users, by far. Approximately 338 million Chinese people were online as of the end of June, according to official state numbers. What's more, Chinese Internet usage is growing at double-digit annual rates, and Baidu dominates China’s Internet search market, with over 60% market share.

The only real threat to Baidu’s market dominance is Google, which has approximately 30% of the market. And while we shouldn’t discount Google as a strong competitor, it has a long way to go before it can do anything to unseat Baidu as the premier Chinese Internet play.

China Stock #2 - China Cast Education

China Cast Education (CAST) provides long-distance e-learning services to over 131,000 students at 15 colleges and 6,500 secondary schools. CAST also provides e-learning services to government ministries and corporate enterprises.

The company’s e-learning business accounts for 75% of its total revenues, and this segment is growing rapidly, as more Chinese enroll in college classes.

During my recent visit to Beijing, I met with China Cast management, and I found them most impressive. Unlike most Chinese companies, CAST is managed by seasoned international executives. After seeing their impressive operation, I came away confident about the company, its management and its continued growth.

That growth is taking place at the rate of over 20% a year, but despite this strong growth, the stock still trades at very attractive valuations.

As long as China’s economic growth continues to lift millions of Chinese into the middle class, the demand for higher education will continue expanding — and that’s what makes China Cast such a strong stock.

China Stock #3 - China Life

If I took a random poll and asked people to name the most explosive sectors in Asia, I doubt many would put insurance on the list. Yet in China, the insurance industry is growing at a rapid pace. As the Chinese middle class expands and people there take charge of their own destinies, I expect more people to purchase insurance.

In the coming years, I look for China's insurance industry to continue growing rapidly, eventually becoming the largest insurance market in the world.

Taking advantage of this trend is China Life (LFC). As the life insurance industry leader with about a 50% market shares, China Life is the dominant player in an extremely underdeveloped insurance market. The company also has the biggest nationwide distribution network in China.

Not surprisingly, about 70% of its network is located in major cities, which is where wealth is growing most rapidly. This means there's still a huge opportunity in the rural areas and second-tier cities. China Life has plans to open another 15,000 branches, and I believe expansion into the rural areas will be a key to the company's growth.

Click here to see all 5 of my Must-Own China Stocks.

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