Looking at small caps provides a refreshing change from a focus on large caps. Is online game operator Giant Interactive (GA.N) unfairly affected by a “China discount?”
Giant Interactive creates and operates online games in China and a detailed summary can be found here. It has no debt on its balance sheet and trades at a market capitalization of around US$2 billion. The stock has more than doubled in the past two years, yet still trades at a single digit P/E ratio (8.7) and with a StarMine calculated five-year compound growth rate of 6.6% (Click here for more information on the StarMine Intrinsic Valuation model). The software industry traditionally trades at a premium to fair value, but any company associated with China is still subject to a discount due to various accounting scandals such as Sino Forest.
Source: StarMine
For those willing to deal with the opacity of Chinese auditing requirements, this discount may offer an enticing opportunity. As noted in other stories the Chinese market has swung from greed to fear and many stocks offer undemanding valuations and potentially interesting risk/reward profiles.
Giant ticks most of these boxes – an undemanding valuation, strong price momentum, positive analyst revisions – as well as strong earnings and credit quality. StarMine’s Val-Mo model (below), which encompasses both valuation and momentum (price and earnings momentum) has been predictive of price performance over the last 18 months – and the signal indicates the stock remains attractive today.
For those wanting exposure to the Chinese market, with a hefty yield – Giant could be an interesting play.
Source: StarMine
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