A Different Route to China

 | Jan 11, 2013 | 12:30 PM EST  | Comments
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Let's say you're a U.S. investor with minimal or no exposure to China in your portfolio.

You're aware that China is the world's second-biggest economy, and that the growth of its gross domestic product was reported at 7.4% in the third quarter. You know that the Chinese economy had been decelerating since March 2010, but that strong export growth in December has many people thinking the growth rate may start accelerating again.

You think you should be there, but you can't bring yourself to buy Chinese stocks because of political risk, moral factors or accounting questions. In that instance, you might want to consider buying shares in U.S. companies with strong commercial ties to China or earn significant revenue there. Here are a few to think about.

SciClone Pharmaceuticals (SCLN) is a biotech firm based in Foster City, Calif., that gets the vast majority of its revenue from selling drugs in China. Its main drug is Zadaxin, used to treat cancer and hepatitis. The stock is down 35% since its July 2012 high, partly because the Chinese government dictated a decline in the price of Zadaxin. At Thursday's closing price of $4.85, SciClone shares seem to me a good value at 8x earnings. The company's debt is less than 2% of stockholders' equity.

Teradyne (TER), located in North Reading, Mass., sells semiconductor test equipment worldwide. It has been operating in China for a long time and logs a decent chunk of its revenue there. Teradyne often earns a return on equity above 20%, yet at $16.96 its stock currently sells for only 11x earnings, a good value. The balance sheet looks strong, too.

NVidia (NVDA) of Santa Clara, Calif., makes graphics chips used in video games. It gets most of its sales in Asia, notably China, where video games are very popular. It, too, has a rock-solid balance sheet, with hardly any debt. Lately, NVidia's sales in Asia have slowed down, while sales have grown faster in the U.S. and Latin America. However, I believe Asian sales will probably bounce back. Analysts expect flat earnings from NVidia over the next couple of years. Accordingly, I don't view the stock as cheap at the present price of $12.23, which is 15x earnings; however, if it drops below $10, it will merit a hard look.

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