You know that the leading companies in the China sector 15 are going to grow; the trick here is to try to assess corporate governance issues, such as, can you believe the accounting?

Accountants know that there is U.S. GAAP, and there is International GAAP, and then there is China GAAP. Guess where you might have a credibility issue?

So, in trying to analyze China corporate financials, sometime it's better to use the KISS system; just keep it simple, stupid. Stick to top line revenue (and hope that revenue recognition methods don't change), assume that the after-tax bottom line is accurate (I wouldn't want to be the CEO/CFO caught cheating Beijing because the PRC leaders really do give meaning to the term ‘chopping block'), and watch for the growth/decline in the number of employees (as the best China companies are always seeking to improve productivity, like in America).

Admittedly this is a rather simplistic view, but outside of oil & gas and telecom services, my red flags for China are really red flags. Stay on your toes or you might find your portfolio on its back.

Having said that, I do like all three of these basic materials companies in China that list their shares on the NYSE.

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Sector 15: Basic Materials
ACH Aluminum Corp of China: half the size of Alcan and more profitable
BYH Yanhua Petrochemicals: Very profitable manufacturer of resins, plastics
SHI Sinopec Shanghai Petrochemicals: Profitable maker of fibers, resins, plastics

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Aluminum Corp of China (NYSE: ACH) produces alumina and primary aluminum in China. It operates four integrated alumina and primary aluminum production plants, two alumina refineries, one primary aluminum smelter and one research institute.

Market cap is $10.3 billion, and 67,400 employees work there, so this is a big company. It is also a financially solid one, and pays out a dividend of 1.86 percent based on Friday's closing price of $62.05.

The corporation is financially stronger than either of its two major competitors Alcoa (NYSE: AA) or (especially) Alcan (NYSE: AL), according to my take on their respective balance sheets. In fact, I also like the operational metrics here better than AA and AL.

EBITDA margin is a very impressive 26.3, and ROE, at 22.1 is excellent. The PEG ratio is an attractive 0.59 so the GARP traders must like the stock.

For a buy-and-hold trader's portfolio, ACH would have performed well in 2004, but cycle traders are now aware that the stock is a bit over-priced. The price has pulled back and may be ready for somewhat of a tumble here, after which it will hit my buy list.

When the auto manufacturers start to gear up operations, this is a company and a stock that will out-perform the broad market averages in New York, Beijing or wherever stocks are listed.

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Yanhua Petrochemicals (NYSE: BYH) manufactures petrochemical products such as resins, plastics and ethylene in China. It is quite similar to its big brother Sinopec Shanghai Petrochemical (NYSE: SHI).

BYH market cap is $1.6 billion, and 10,200 employees work there, so this is a large company. It is also financially solid, probably a little more so that SHI. It pays a dividend of 1.28 percent based on Friday's closing price of $23.54.

EBITDA margin is 14.3, which is not great, but ROE is an impressive 20.7. The PE ratio is an attractive 9.9 so value investors must be interested.

For some reason, unbeknownst to me, the stock price has been absolutely flat in trading this year. If I were going to by the stock, I'd want to have an answer to that.

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Sinopec Shanghai Petrochemical (NYSE: SHI) , like Yanhua Petrochemicals (NYSE: BYH) manufactures petrochemical products such as resins, plastics and ethylene in China. It is a bigger company than BYH, with a market cap of $3.0 billion, and 31,000 employees.

SHI is fairly solid financially, although not as much so as BYH, if you can believe the accounting. It pays a dividend of 2.29 percent based on Friday's closing price of $42.10.

EBITDA margin is 12.2, and ROE is 15.3, which in both cases are a little inferior to BYH.

The PE ratio is 10.3, which is slightly higher than BYH.

For some reason however, unbeknownst to me, the stock price has been absolutely flat in trading this year. If I were going to buy the stock, I'd want to have an answer to that.

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While I may not be too hot on this China sector 15 right today, just as I questioned its stock prices last 2Q04, it's just a matter of time.

After a market shakeout, this is a good place to deploy money because the economic growth in China is not going to subside for many years going forward. Traders have to learn to buy the right sectors, and the right stocks, on weakness.

Here's three of them. Enjoy.

BCara@BillCara.com