Nov. 21 (Bloomberg) -- If Warren Buffett, Alan Greenspan and Li Ka-shing are right about China's stock market, China Finance Online Co. may lose its rank as the best-performing foreign company listed in the U.S.
American depositary receipts for the Beijing-based company, China's biggest provider of online financial data, have dropped 32 percent this month, as the nation's benchmark CSI 300 Index fell 12 percent. The ADRs lost 20 percent today alone, to $23.74.
China's world-beating rally may be a ``bubble'' ready to burst, say the former U.S. Federal Reserve chairman and Li, Asia's richest man. Billionaire Buffett, chairman of Berkshire Hathaway Inc., last month urged investors to be ``cautious.''
``If there is a slump in China, the risk of investing in some companies whose earnings are closely linked to the market will increase,'' said Tim Leung, who helps manage $1.7 billion at IG Investment Ltd. in Hong Kong. ``When there is a slump in the market, retail investors do much less trading.'' Leung said he doesn't own China Finance shares.
China Finance's ADRs have climbed more than fivefold this year on the Bank of New York ADR index, outperforming U.S.-listed PetroChina Co., BHP Billiton Ltd. and Baidu.com Ltd. The number of customers who pay for the company's stock-picking software and financial data rose 61 percent to 45,500 in the first nine months.
The ADRs, certificates that represent shares of foreign companies, are also the best performer in the Nasdaq Computer Index and the USX China Index in the past six months.
More Investors
China's CSI 300 index has surged 148 percent this year, the world's best return. The benchmark tracks the 300 biggest companies on the yuan-denominated A-share markets in Shanghai and Shenzhen.
Domestic investors opened about 33 million accounts for trading stocks and mutual funds in the first eight months of this year, six times the number opened in all of 2006, according to China Securities Depository and Clearing Corp.
China Finance's profit in the third quarter more than tripled to $1.9 million from a year earlier, it said in a statement today. The company forecast 2007 sales of as much as $60 million, compared with a previous projection of at least $45 million.
``Right or wrong, China Finance's stock moves with Chinese A-share and Hong Kong market sentiment,'' said Alex Xu, an analyst with Brean Murray Carret & Co. in New York.
Xu, who has a ``buy'' rating, is one of two analysts covering the company, according to Bloomberg data. Dick Wei, an analyst at JPMorgan Securities Inc. in Hong Kong, has an ``overweight'' recommendation on China Finance.
`Irrational Exuberance'
Hutchison Whampoa Ltd. Chairman Li said in May that the Chinese stock market ``must be a bubble.'' The CSI 300 trades at about 39 times estimated earnings, compared with about six times for the MSCI Asia Pacific Index, which tracks more than 1,000 companies in the region.
Asked if China was in a state of ``irrational exuberance,'' Greenspan told a conference of insurance executives in Boston on Oct. 30: ``I think so.''
``When you don't expect it, it breaks,'' Greenspan said, echoing Buffett, who said on Oct. 24 that ``it's easy to be carried away in the stock market when things are going well.''
Investors may be starting to listen. As of Nov. 20, the CSI 300 has risen in just three trading days this month.
``The biggest risk for China Finance is if there is a long- term pullback in the Chinese stock market,'' said JPMorgan's Wei.
Shorts Multiply
Short positions against China Finance Online surged ninefold to 2.1 million shares as of Oct. 15, from 226,714 a month earlier. ``Shorts'' are shares borrowed and sold by investors who bet they will fall so they can be repurchased at a lower price. The investor pockets the difference.
``China's retail investors have driven the rally, and when we have a correction, retail investors will emphasize it,'' said Gabriel Gondard, who manages about $10 billion at Societe Generale SA venture Fortune SGAM Fund Management Co. in Shanghai.
The CSI 300 index hit a record low in June 2005. In the same month, China Finance's ADRs had fallen by 50 percent from the initial offering price of $13. The online financial data provider, founded in 1998, listed on the Nasdaq in October 2004.
``If there is a correction in the market, investors will have greater need for information and data about the market,'' China Finance Chief Executive Officer Zhao Zhiwei said by e-mail. ``To a certain degree, that may result in a greater demand for our services.''
China's economy, which has grown more than 11 percent for three consecutive quarters, may continue to fuel increases in the nation's equity markets. Disposable incomes for urban households, after adjusting for inflation, rose 13.2 percent in the first nine months from a year earlier. Earnings in rural areas increased 14.8 percent, according to government data.
``As people in China have more money, more and more of them will begin to put their money in the stock market seeking higher returns,'' said JPMorgan's Wei. ``I'm optimistic on the outlook for China Finance.''
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