 Casey: Without Borders
How to Safely Play China's Growth
Fitzroy McLean
Casey Research
Without
Borders
May 13, 2008
In our constant travels for
Without
Borders, we look for progressive, undervalued international
investment opportunities in booming economies with governments
that treat capital well. To even begin to make the cut, the countries
also have to possess multiple economic growth engines, open trade
and business freedom.
Finding these opportunities
is just half the mission. The more important, and often more
difficult task, is finding safe ways to play them.
Consider China. Unless you've
been cooped up in Guantanamo for the last few years, you're already
familiar with the miracle of China, Inc.; 11.4% GDP growth, the
world's "go to" manufacturing center, a 1 billion strong
local consumer market, and some of the greatest business opportunities
in the history of the world.
So far, so good. But when you
drill down another level, the level where you hope to find undervalued
investment opportunities, things quickly get more complicated.
Thanks to that country's emerging middle class, flush with exponential
growth in purchasing power and investable funds... the Shanghai
stock exchange has become one of the hottest capital markets
in the world. And one of the most dangerous.
Over the last 7-years, the
Shanghai Composite Index has returned approximately 80% to investors
with some serious roller coaster rides along the way, including
days of such catastrophic meltdown that even the most seasoned
investors make a bee-line for the nearest emergency exit.
The Price/Value Disconnect
The most disturbing thing about
the Shanghai market is the often complete disconnect between
the price of a given stock and the value of the underlying company.
In China, soothsayers in the local newspapers predict what numbers
will endow great luck... just like a fortune cookie at your favorite
Chinese buffet; and as you are undoubtedly aware, stock symbols
in Shanghai are numbers, not letters. So when the great sage
says 0, 4, 7, and 9 are today's lucky numbers, that spells good
news for Shanghai Zenhua Port Machinery Co., symbol: 900947,
and poof, the stock jumps-irrational exuberance at its
most irrational. This and similar actions of an inexperienced,
first generation investor class, coupled with a general overconfidence
among the Chinese on the outlook for their stock market, periodically
drive the Shanghai exchange to bubble territory, that is subsequently
corrected in stomach-churning down moves.
So, the sort of booming economy
and big upside we like, but with an unpredictable and wildly
irrational stock market.
What's an investor to do?
Because we're looking to buy
into the growth, and to do it safely, stepping up to the craps
table in Shanghai along with all the other speculators and soothsayers
isn't going to cut it.
Instead, we invest in undervalued
Chinese companies listed on more established exchanges. Simple,
but effective.
Some examples:-
We are currently following
a Jersey-domiciled, London-traded cement company based in the
western China province of Shaanxi (not to be confused with the
neighboring Shanxi province). Shaanxi is one of the fastest growing
provinces in China, and this cement company is ideally positioned
to capitalize on this growth. Currently trading on London's Alternative
Investment Market (AIM) at only 6.4 times earnings and 4.6 times
current assets, this stock is as undervalued as it gets, especially
considering the growth prospects.
While it has already provided
us with solid profits, we see it as a relatively near-term double
from today's levels. But we digress from the central point here...
which is, because it trades on the London AIM, and not Shanghai,
your shares have nowhere near the volatility.
Confirming that point, we looked
at twelve worst performing days of the Shanghai Composite Index
since January 1 2007, with single day losses ranging from 5%
to over 10%. On average, during those steep drops, our Chinese
cement play outperformed the index by an average of 6.85%. Viewed
from another angle, on the 12 worst performing days of the Shanghai
Composite Index since January 2007, our AIM-listed Chinese cement
company actually posted a daily gain on eight of those
twelve days, and posted a far better return than the index on
all twelve.
For us as investor this means
we are able to capitalize on one of the fastest growing industries
in one of the world's fastest growing economies with one of the
industry's most seasoned management teams, and doing it all safely,
with far less volatility than in Shanghai.
We believe in the Asia growth
story, and we believe in companies like our China cement story
(the name of which we can't share here because it wouldn't be
fair to our subscribers). But we are only willing to risk our
hard earned capital in a way that makes sense to us. So in China,
we look for solid, undervalued companies on established exchanges
- and there are a number of these gems if you dig for them -
and save the gambling for the casinos in Macau.
-Fitzroy McLean
###
Fitzroy McLean is the co-editor of Without Borders
from Casey Research, a monthly service dedicated to searching
the world for undervalued, lower risk investments. A three month,
no-risk subscription offer is available that will bring you current
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