This Chinese Company Leaves Even Tesla in the Dust

Tesla Motors Inc. (Nasdaq: TSLA) stock hit a new high on Aug. 29 thanks to very positive news out of China.

The world leader in electric vehicles is set to install 400 charging stations in roughly 120 Chinese cities. And that's on top of 200 charging stations Tesla already operates in the world's most populous nation.

The news comes just weeks after Tesla began selling its luxurious $70,000 Model S in China.

So far this year, TSLA shares are up more than 80%. And its Chinese expansion should propel the stock even further - in fact, I think China will become Tesla's biggest market within the next year.

But that performance, as impressive as it is, pales in comparison to the performance of a Chinese auto e-commerce company I told you about on Feb. 4.

Since then, your shares have gone on a tear, rising some 220%.

This exciting stock isn't done yet, however, and I think you're going to make another 50% over the next couple of years. Let's see how that's going to happen...

A Very Speedy Auto Rally

My good friend and colleague Money Morning Executive Editor Bill Patalon and I have many things in common, not the least of which is we're both "car guys."

I used to be an auto analyst in Detroit, and I've rebuilt a couple of cars and worked on a dozen more. And Bill loves to regale me with stories of how he is working on his "little hot rod" - a 1931 Ford Model A Roadster Pickup with a beefed-up, small-block V8.

Naturally, then, when he suggested doing a Q&A with me last February about my views on China's burgeoning new-car market, I jumped at the chance.

At the time, I was convinced Bitauto Holdings Ltd. (NYSE ADR: BITA), which offers e-commerce and marketing services to China's auto market, offered savvy tech investors the chance for massive gains in relatively short order. Here's how I described Bitauto to Bill:

Talk about a growth machine. It has a three-year sales growth rate of 54% and has grown earnings per share in excess of 60% over the past three years.

If it just had half that earnings growth, profits per share would double in less than three years. In fact, I think the stock could double well before that if everything plays out the way I believe it will.

To put it mildly, the stock greatly exceeded my optimistic projections - again, a 220% pop in about seven months.

However, when a stock goes on such a quick, impressive rally, many investors wonder how much upside is left. (I'm betting that includes many of you who didn't invest in Bitauto the first or second time I recommended it.)

In this case, I still see potential for strong gains - and here's why.

Bitauto is uniquely positioned to profit from big changes reshaping the market for new cars and light-duty trucks in China - a nation in the midst of a massive transformation based on several overlapping trends.

First, of course, is the long-term move from communism to capitalism. That alone is greatly raising incomes and standards of living.

Second, China's leaders want to move away from their previous emphasis on state-sponsored infrastructure spending to one that depends more on open markets.

Third is the massive population shift away from the provinces to the big cities.

With 1.3 billion people, China needs a lot of cars. And rising standards of living in urban centers are building demand for new vehicles.

Here's one way to look at China's exploding urban growth.

Kunming, a backwater provincial capital in southwest China you've likely never heard of, has a population of 3.8 million - about equal to Los Angeles, the second-largest U.S. city. And its population is expected to rise 50% by 2020.

And that's not all. Chenggong, a suburb built over the past few years to handle some of Kunming's expansion, already is home to more than 300,000 people - and should have a million residents by the end of this decade.

With so much rapid economic development, it's not surprising that China quietly became the world's largest auto market in 2010 and continues to grow. Analysts at Scotiabank are projecting 2014 sales of 18.86 million vehicles, for a two-year gain of 39%.

Moreover, Scotiabank data shows that, over the past quarter century, vehicles sales in Asia grew some 334%, with China accounting for the vast majority of that increase.

The United States is also in the midst of an auto boom, but its market lags China. In July, vehicle sales hit roughly 1.4 million units. Not only was that a roughly 10% increase from the year before, but that's the highest American July sales rate since 2006.

Thus, Edmunds.com forecasts vehicle sales of 16.4 million in the United States this year. That makes China's relatively young auto market already some 15% bigger than America's.

Wall Street Takes Notice of Bitauto

While the accelerating Chinese auto market is the main driver behind Bitauto's growth, it certainly isn't the only one.

I found Bitauto on my own - with no help from Wall Street analysts or other mainstream stock pickers. In fact, I tend to ignore all the noise coming off the Street.

But I like it when they follow my lead - because it can mean big profits for you. A "Buy" rating from a popular investment site can attract huge amounts of liquidity to a particular investment. And if you already own the stock, that's good news for you.

In this case, Zacks Equity Research just put its most bullish rating on Bitauto. And it backed that rating with some extreme positivity.

"Not only does the stock have decent short-term momentum... it is seeing solid activity on the earnings-estimate-revision front as well," Zacks analysts wrote. "These positive-earnings-estimate revisions suggest that analysts are becoming more optimistic on BITA's earnings for the coming quarter and year. In fact, consensus estimates have moved sharply higher for both of these time frames over the past four weeks, suggesting that Bitauto could be a solid choice for investors."

This is particularly good news for you because of the so-called "Zacks Effect." Since 1986, stocks with a Zacks "Strong Buy" ranking have generated an average annual gain of 26%. That's nearly triple the return of the Standard & Poor's 500 Index.

Additionally, Bitauto isn't "coasting" on China's growth. It's seeking out new niches within that market to exploit.

Until now, the company had been focused on the new-car market. But Chief Financial Officer Andy Zhang recently said that 4,800 Chinese used-car dealerships also are using Bitauto offerings.

As part of that new thinking, Bitauto has launched a valuation product for used cars, a Kelley Blue Book for the Chinese market. It developed this beta version with the China Automobile Dealers Association and Kelley Blue Book Co. Inc.

TSLA Has Competition in China - but Bitauto Wins, No Matter What

Tesla Motors (Nasdaq: TSLA) is not the only nameplate looking for big things in China. Most of the major U.S. and European nameplates either sell cars there directly, have Chinese joint ventures, or do both.

Ford Motor Co. (NYSE: F), for one, is ramping up there as part of its plans for higher global sales. Last year, Ford sold nearly a million wholesale vehicles in China, a 49% increase.

As for Tesla, its leaders haven't said how many cars they've sold there. However, according to Tesla's recent second-quarter earnings statement, the "Model S is off to a very encouraging start in China."

TSLA shares jumped 2.5% Aug. 29 to close at $269.70. And shares kept rising over the next several days, reaching an intraday high of $288 on Sept. 3.

But as far as Bitauto goes, it doesn't matter whether U.S. or European or Chinese carmakers do well - or all of them. No matter who wins, Bitauto comes out ahead.

It has a major high-margin way to profit from China's huge car market. As a leading automotive e-commerce player, it sells online advertising and provides reviews and pricing info for consumers.

It also serves as an online showroom for both new- and, increasingly, used-car dealers. Bitauto even helps dealers with digital ad campaigns, as well as setting up and maintaining websites.

In other words, it's got a seat at both sides of the table - buyers and sellers - with a very high-margin business model. It has operating margins of more than 16% and a return on equity of 20%.

And check this out: The most recently quarterly earnings were up 96%.

With a market cap of $3.68 billion, Bitauto is trading at around $88. It has a three-year sales growth rate of 50% and has grown earnings per share by 57% over the same time.

If it just had half that earnings growth, profits per share would double in about 2.5 years. But in a case like this, when a stock has had a huge run in a few months, it pays to be conservative.

So, I cut that forecast in half and am projecting two-year gains of about 50%.

Even with that caution, Bitauto is still the best e-commerce play on China's huge auto sector.

No matter how well Tesla's luxury cars do in China (or TSLA stock, for that matter), Bitauto stands to gain - and so do you.

More from Michael Robinson: Apple shares have dipped recently on a string of overhyped "threats," like the iCloud celebrity photo leak scandal. But the AAPL stock price won't stay low for long - in fact, it's headed to a split-adjusted $1,000 per share in less than two years. This may be your last chance to get a bargain on Apple...