Three Chinese Stocks to Finish 2010 in the Black

Overall, I still believe that we will see 40% upside in many China stocks by year-end, most of it in the fourth quarter, and now is the time to position for the upcoming rally. And in my book, these picks are your best bet to capitalize on this trend:

#1 China Valves: Currently, the largest non-state owned industrial valve manufacturer in China, China Valves Technology (CVVT) has shifted its focus to high-end technology products used in nuclear power and petrochemical industries. As a result, profit margins have improved significantly. From 2005 to 2009, the company's total revenue soared from $20.0 million to $95.4 million. Gross profit grew from $8.2 million to $46.8 million and net income jumped from $3.7 million to $24.9 million in the same period. After the sharp market sell-off since April, the company is trading at only 9x this year's PE, which is dirt cheap for a company growing earnings at 61% a year. Looking forward, I believe the company not only can maintain but could also further improve its margins as it captures even more market shares in high-end segments.

#2: China Yida: China Yida Holdings (CNYD) is an integrated travel company that I believe will win big. Like Disney, China Yida operates TV stations and scenic parks and is a diversified entertainment and leisure enterprise focused on Chinese media and tourism. CNYD has an impressive average annual earnings growth rate of 63% in the past four years, a dirt cheap valuation of less than nine-times its trailing 12 month PE, and a unique business model similar to Disney. The company has three brand-new parks in development and expects to generate revenue from these sites by the end of 2012. CNYD is a great bet to snap up now before it attracts additional institutional attention and shares head sharply higher.

#3 China Life: The largest insurance company in China, China Life Insurance (LFC) has a dominant market share of 51% in a country where the insurance industry is growing a solid 15% a year. In the coming years, I look for China's insurance industry to grow rapidly and eventually become the largest insurance market in the world. China Life Insurance is expected to consolidate its leading position in major Chinese cities due to the new accounting standards that will soon be published by the China Insurance Regulatory Commission. Estimates based on the top three Chinese insurers' 2009 annual reports show that China Life Insurance would remain leading position in 33 major cities. These accounting changes don't really reflect any changes to the company's business, but nonetheless remain a positive for existing investors since they show the company in an even brighter light.

As of this writing, Robert Hsu was recommending all three of these China stocks to subscribers of his newsletter China Strategy.