2. Returns comparison: Ctrip, China Mobile, PetroChina and Baidu
3. ValuEngine's portfolio optimization for China ADRs
4. Portfolio optimization engine's parameters and constraints 
On October 22, nineteen China ADRs currently listed on NYSE and NASDAQ can be traded on the Singapore Exchange [SGX]. Their total market cap of approximately US$600 million is equal to the market cap of the whole SGX. Will they significantly boost the liquidity of SGX, and more importantly will retail investors take to these ADRs? In this sneak preview, using ValuEngine Institutional software, we highlight some aspects of these ADRs. [Individual reports on these ADRs are available on ValuEngine's web site]1. Image 1 shows the list of 19 ADRs. They cover a range of sectors from Internet companies like Baidu and Netease to Utilities (Huan Eng Power), Energy (PetroChina, Yanzhou Coal), Biotech (Mindray), Alternative Energy (Suntech, Trini) to Telecoms (China Telecom, China Mobile etc) to Services (Ctrip, China Eastern Airline). Price-wise, Asian investors may not be used to the high price [see market price as at yesterday]. Especially the traders with a shorter term investment horizon looking for a quick turnover. They may be a little disappointed as these big cap China ADRs' behavior are not much different from the average S&P500 constituent stock. [ see previous post on Sept 18 ]But for the longer term fundamentals-based investor, they are now able to tap into China's enormous growth potential. Being listed on U.S. Exchanges, they are also subject to the regulatory environment there and therefore have some edge in quality over other China stocks.
2. Image 2 is a comparison of four stocks: Ctrip a travel and tourism site, China Mobile the cellphone telecom, PetroChina and Baidu the well known Search Engine. I did not choose the older more mature ADRs like Yanzhou coal and Huan Eng Power as their returns were well below these newer industries. You can see how each stock behaved before and after the financial crisis and judge for yourself, where the future lies for China ADRs.
3. In image 3, I tried to do portfolio optimization of the 19 ADRs to determine my % capital allocation if I were to create a portfolio of these ADRs as investment. ValuEngine was not able to optimize all nineteen ADRs as for one reason or another, some of the ADRs lacked some data required for quantitatve analysis of their valuation, forecast, and risk assessment or were automatically filtered out by my specifed optimization constraints. Therefore the results show a portfolio of only ten of these ADRs. The ValuEngine models gave greater weighting % to Changyou the interactive games developer, Shanda the multi-player online games site, Ctrip the travel site, and surprisingly, an old-fashioned industry like Huaneng Power. The valuation column shows the +/- % valuation, and the valuation rank column ranks the ADRs in comparison with 4500 oher U.S. stocks. (from 1 to 100, the higher the rank the more undervalued). You also have the forecast for 1-month as well as 1 year, and you will notice the very high P/Es that these ADRS are trading at- except for Changyou and Trini Solar. I wouldn't pay too much attention to the forecast as these ADRs are more dynamic than typical US stocks, and their characteristics change at a faster pace. Image 4 below shows that such a porftolio would have a forecast annual return of 18.67 % based on the current situation. The Beta of the portfolio is not too bad at 1.34, but the standard deviation (volatility) is high at 29 standard deviations.
4. Image 4 shows my constraints for this portfolio optimization exercise: I restricted each stock to a maximum of 20 % of portfolio capital, with no stocks from the same sector constituting >50 % of the portfolio in $. I also deleted any stock that is > 20 overvalued. The initial capital is US$1 million. The portfolio was optimized based on 1 month forecast. * This is important to note: Of course I can optimize based on 1 year or even 3 months forecast. But this would be essentially useless. If there's one thing I learned all these years: Like weather forecasts, stock forecasts have less probablility of being upset, the shorter the period of forecast. 1-day forecasts are best for technical trading, but for fundamentals, 1-m at least gives you some guidelines, though you must be prepared to constantly update your forecasts.
