Chinas 3 Up-And-Coming Stocks to Watch

By Markets Fool.com

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Development in Hong Kong offers a visual for the kind of growth taking place in urban China.

China has been dubbed the "Wild West" of investing, and for good reason: a history of dubious reporting standards, lax oversight, and a competitive landscape that is difficult for many individual investors in North America to fully comprehend.

That's why this article is about stocks to watch, not stocks to buy. There's no doubt that even if growth in China is slowing, a lot of fuel remains in the country's tank. As the country continues to develop, smaller stocks that are finding a niche today could become huge winners a decade from now.

But identifying those winners early on is a difficult task. To help you start your research, we'll cover three up-and-comers in China, what they do, their operating history, and what kind of risks you need to be aware of before diving in.

Ctrip.com
China has an enormous and growing industry for travel. For years, Ctrip enjoyed a first-mover status in online booking similar to what priceline.comexperienced in North America and Europe.

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The company, co-founded in 1999 by now-CEO James Liang, grew its revenue by 32% per year between 2006 and the end of 2013. From the bottom of the Great Recession to late 2013, the stock shot up 485% -- far outpacing the broader market.

Since then, however, the stock has been virtually flat. A big reason for that has been the entrance of other market players into the China travel scene. The most notable is Qunar, which is backed by Chinese online search leader Baidu. By charging a lower take rate for airline and hotel bookings, Qunar has taken market share from Ctrip and started a race to the bottom in terms of pricing and margins.

The ace up Ctrip's sleeve is its mobile app. Management hopes this app will be the ubiquitous, one-stop-shop for the average Chinese citizen's travel needs -- from airfare to hotels to buses and trains, and even passport services.

By the end of last quarter, 600 million Chinese travelers had downloaded the app -- up 71% from the preceding quarter. That kind of mindshare will be necessary if Ctrip hopes to defeat Qunar, become the dominant, entrenched player, and return to its previous days of healthy margins.

E-Commerce China Dangdang
Since Dangdang came on the scene in 1999, many have described it as the Amazon.comof China, in that it began by selling books and has since expanded to other merchandise. That comparison, however, might not be very fair: Amazon is the undisputed king of e-commerce in North America, but Dangdang's reach pales in comparison to other Chinese players, particularly Alibaba.

That being said, the company's growth has impressed over the years. Revenue has grown by 50% since 2007, and was up 28% over the past year. Unlike Ctrip, the stock has largely disappointed -- it now sits 70% below its post-IPO high of 2011.

Some of the reason for that drop has to do with the competitive landscape in China, and some with the fact that the company only recently became profitable. At today's price, shares trade hands for 50 times earnings -- which means that even though the stock has fallen, investors have high expectations moving forward.

The most important thing to watch will be Dangdang's ability to continue growing revenue while leveraging its network of fulfillment centers. Margins are rising again after the company invested millions in building out its infrastructure. If revenue can grow north of 25%, the company might just deliver on such expectations.

Bitauto Holdings
Finally we have Bitauto, co-founded in 2002 by current CEO Bin Li and focused on delivering an e-commerce platform to meet the growing demands of China's auto sales force. Specifically, Bitauto provides auto listings for consumers, a CRM platform for auto dealers, and advertising services within its home nation.

The company went public in late 2010 and had a terrific run in which the stock shot up 665% by September of last year. A big part of that involved the fact that, between 2009 and the end of 2013, revenue grew by almost 50% per year, and the company went from being unprofitable to earning $1.00 per share. Over the last 12 months, Bitauto has earned $1.92 per share, and it now trades for a reasonable 26 times earnings.

Since last September, however, the stock has been extremely volatile, and is now trading 45% lower. This comes despite strong growth in revenue and earnings, along with forecasts that have come in above expectations.

The biggest concern here is simply that the company's growth will slow. Earlier in 2015, the Chinese Association of Automotive Retailers announced that production and sales were down on a year-over-year basis. That slowdown was by less than 1 percentage point, but it points to how closely the company's stock is tethered to automotive industry trends in China.

The article Chinas 3 Up-And-Coming Stocks to Watch originally appeared on Fool.com.

Brian Stoffel owns shares of Amazon.com, Apple, Baidu, Ctrip.com International, and E-Commerce China Dangdang. The Motley Fool recommends Amazon.com, Apple, Baidu, Ctrip.com International, and Priceline Group. The Motley Fool owns shares of Amazon.com, Apple, Baidu, and Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.