Inside Wall Street: Making a Well-Placed Bet on China's Growth

China's continued massive investment in infrastructure to bolster economic growth is a boon to many big and small companies in the country that are able to participate in and benefit from this unprecedented government spending. One Chinese company that stands to benefit in a big way is tiny and little known COGO Group (COGO), which provides some of the nuts-and-bolts components and expertise that local manufacturers need to produce high-performance and top-quality products. In particular, COGO provides its clients in China with integrated circuits and other electronic systems and design expertise that aren't yet widely available in that nation.

"COGO is well aligned to capitalize on China's future growth," says Brian J. White, analyst at Ticonderoga Securities. China, he notes, can still deliver growth "well above the developed world and maintain its strong balance sheet." And COGO, he argues, is a play on the "growth of China's consumer class, the build-out of the country's mobile Internet and [the government's] continued infrastructure investment across the country."

Shares of COGO, however, have hardly participated in the stock market's strong rallies, including the September advance, mainly because it's still largely an unknown entity among U.S. investors. Now trading on Nasdaq at $6.47 a share, the stock is down from its 52-week high of nearly $8. Some analysts expect it to trade higher -- in the $10 to $12 range -- based on the company's rising sales and earnings, plus its robust growth prospects.

Collaboration With U.S. Companies Is Key

COGO focuses on three key markets in China: digital media, telecom equipment such as 3G cell phones, and the fast-growing industrial sector, where it targets China's electric grid system, smart (electric) meters, high-speed railway systems and auto electronics. In providing customized module designs for these diverse markets, COGO is able to cut back the research and development burdens and operational costs of its equipment customers.

But one of COGO's effective strategies for success is its collaboration with some major U.S. tech companies, including Microsoft, (MSFT), Intel (INTC), Broadcom (BRCM) SanDisk (SNDK) and Free Scale Semiconductor. COGO also partners with Japan's Panasonic. COGO's solid customer base of 1,500 major blue-chip and small enterprises include Alcatel-Lucent's (ALU) unit in China, Huawei, NARI Technology Development and electric-car maker BYD (Build Your Dreams) Auto. COGO develops and provides the software systems for BYD's hybrid and electric cars. No less than Warren Buffett is fascinated with BYD's operations, prompting him to invest $250 million for a 10% stake in the company.

COGO recently expanded its role in China's auto industry by signing up Geely, China's leading carmaker. COGO will provide key components for Geely, including GPS navigation, in-car personal computers, as well as a "black box" data recorder similar to those found in airplanes. Given China's 75 large auto vendors, COGO has considerable opportunity for growth in the industry because it has positioned itself prominently into the sector's mix.

"Trends Remain Positive"

After COGO posted solid second-quarter results, some analysts raised their sales and profit estimates for 2010 and 2011. Scott W. Searle, analyst at investment firm Merriman Curhan Ford, rates COGO a buy with a 12-month price target of $10 to $12 a share. He has raised his earnings estimate for 2010 to 79 cents a share on revenues of $371.4 million, up from 78 cents on $360.3 million. For 2011, he pushed up his earnings forecast to 90 cents on revenues of $412.2 million, from 88 cents on $396.2 million.

"Overall, trends remain positive on multiple fronts" at COGIO, says Searle.

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Several large U.S. institutional investors have already acted on China's continued economic expansion, including AXA Investment Managers, Paris, which has accumulated a 5.3% stake in GOGO. AXA Investment Managers, U.K., owns another 4.4% of the stock. Also an early bird in COGO is Cadian Capital Management, which has amassed a 7.2% stake.

So, for investors who see China as the still-expanding economic giant, COGO may be the way to participate in its continuing robust growth.