DENWAY Investment's fortunes this year are a perfect example of the fickle nature of stock markets. In February, the company flotation was 657 times over-subscribed, attracting $240 billion. The share price surged to a euphoric high of $2.70, but has now been completely forgotten, sinking to almost half that level. At $2.70, it was massively over-valued. But based on the classic investment strategy of buying the stocks that nobody else is looking at, the Peugeot car manufacturer should be moving back into attractive territory. Morgan Grenfell Securities is forecasting net profit of $186 million in 1993, representing a price-earnings ratio of 11.8, despite fully diluting for the issue of new shares from the flotation. And there is growth to come. At the time of the share offer the yuan had already sunk through the floor, and the issue of China's GATT membership was high in investor consciousness, with the obvious concerns over the impact of subsequent foreign competition. Yet brokers were falling over one another to pile into the stock. Six months later, little has changed. The yuan continues to fall, but it has now stabilised. Also, austerity measures have been introduced to curb rampant consumerism, but since demand for vehicles has always massively outstripped supply, this is not a problem for Denway. In addition, moves to restrain foreign imports would be favourable. The bulk of Denway's earnings come from the sale of Peugeot vehicles manufactured by a joint venture between the Guangzhou municipal authorities and the French car manufacturer and is the second largest car manufacturer in China. Clearly, it has suffered from the increased import bill resultant from the higher yuan. However, two factors are in its favour. The French franc has been extremely weak, and this is a major part of imports, due to the Peugeot connection. Secondly, the group has pushed to increase the proportion of components manufactured in China. When the company was set up, about 15 per cent of product was sourced in China. The figure is now 60 per cent. About $200 million of the listing proceeds will be channelled into manufacturing car components, which will further lower dependence. The issue of GATT and foreign competition eventually will be an issue, but Denway has a lot of time on its side. There is no indication that China faces any immediate hope of gaining GATT membership, meaning that Denway can continue to operate in what effectively is a closed market. As a result, the outlook for 1994 is extremely positive. Production capacity increases will enable strong sales growth, and Morgan Grenfell forecasts earnings to increase by 39 per cent to $258 million. Based on this figure, the shares are trading on a prospective price earnings ratio of nine. When China joins GATT, its car industry will retain some protective barriers, meaning that competition is phased in gradually, a fact which does not justify the recent share performance. The company may not have deserved all the fuss it received in February, but it also deserves more than the current market rating to which it has sunk. At yesterday's closing price of $1.54, it looks attractive.