A Chinese stock report for Canadian investors
These Canadian small cap stock specialists are experts on China, and while they see problems in its economy, they also see opportunities.
Almost every market report these days contains a few jittery words about China.
“Concerns about a slowdown in China,” or “worries about a real estate bubble in China” often come right between “anxiety over European debt” and “a slow U.S. recovery.”
Since it is widely accepted that China is the engine that is hauling the global economic recovery, this is indeed something of a nail-biter.
Especially in this country, since many Canadian resources help stoke that Chinese engine.
To get a reading on the situation, we turn to a group of independent Canadian researchers who have made it their business to understand China and its economy thoroughly.
KeyStone’s Small Cap Stock Report has recommended a number of Chinese stocks to its clients and done very well into the bargain.
Concerns over China are not without merit, this advisory concedes.
But these experts have heard it all before and are not prepared to give up on the enormous potential of the Middle Kingdom.
Two stocks they like are not coming off their buy list, despite temporary weakness in the market. And one stock that has fallen is back on that list.
Bubblicious levels
The Chinese economy is shifting gears, states the advisory. It is moving its emphasis from exports to the domestic front. But weak global demand has spread its tentacles into both areas.
And yes, real estate looks shaky. “In certain segments and regions it appears China’s housing market is at bubblicious levels.”
The researchers retort that they have been hearing the same criticism and skepticism since they began looking at the region over a decade ago.
“Each time, over the long term, skeptics have been proven wrong and we have been very pleased with our returns from buying a basket of companies operating in this market.”
“Hiccups” are bound to happen, the advisory adds. China is undergoing an industrial revolution, and no industrial revolution in history has gone merrily along without some setbacks.
But as far as these researchers are concerned, “not to have some exposure to this growth market as part of your broader diversified portfolio will likely be to your detriment long term.”
No mortgage crisis
“Now we are well aware that the property boom is helping fuel the Chinese economy,” says the advisory. “Many analysts claim new Chinese property owners are encouraged to take out mortgages they can ill afford. Sound familiar?”
Is China following the U.S. down the subprime mortgage path? Prices of new homes are rising at an annual rate of 20 per cent. Big city apartments are climbing even faster. The risk, says the advisory, is that homebuilders are focusing on upper income buyers.
But in China the government is not shy about stepping in. It has decreed that 70 per cent of new land should be used for affordable housing and apartments. A down payment equal to 50 per cent of the price for land purchases is now required within one month of signing the contract.
What’s more, the Chinese are accustomed to down payments Westerners might flinch at — from 20 to 50 per cent. That offers a cushion against a drop in the value of the home. And wages are rising with the value of homes, these researchers assure us.
In short, most Chinese who are buying homes (a distinct minority of the population) are acting conservatively. They are not getting the kind of no-money-down loans that prevailed in the U.S.
Put it in perspective, says the advisory. The ratio of housing loans to GDP is about 15 per cent in China. It reached 79 per cent in America. In some regions there may be bubbles forming, but don’t look for a Chinese re-make of the U.S. mortgage crisis.
Three listed in Toronto
But do look for Chinese stocks trading at very affordable levels, the advisory says. Its research team was among the first to get a handle on Chinese companies listed in Toronto.
The most famous of these is probably Sino-Forest Corporation (TSX-TRE), which this advisory first recommended in 2002 when it traded at $1.15. The company has almost 700,000 hectares under plantation in the People’s Republic. Like an integrated oil company, it covers just about every stage of the business, from standing timber to finished fibres.
From a 52-week high of $21.75 in April, the shares fell to $15 in July. The advisory, which had sold some shares and downgraded its rating, has returned it to a buy after some pleasing first-quarter numbers.
The stock has moved back up to $16.09. There is no dividend, which is also the case with the next two stocks.
Boyuan Construction (TSX-BOY) has remained a buy even as its shares fell from just under $3.00 to just above $2.00.
This company handles commercial and residential building, municipal infrastructure and engineering, so it has plenty of work. It has a solid growth rate and a forward price/earnings (P/E) ratio of just over 5.
The shares trade at low volumes, so it doesn’t take much to move them one way or another. Yet the stock is almost exactly where it was a month ago when we checked in with the advisory, at $2.07.
Another firm that hasn’t gotten the full attention of the market yet is Zungui Haixi Corp. (TSX-ZUN). This company makes athletic footwear, casual leather footwear, apparel and accessories.
Zungui has almost no debt and an attractive forward P/E ratio near 6. The stock has lost close to 50¢ since last month and is now at $2.24. But the advisory likes the fact that it can buy the shares to a 20 per cent discount to the IPO price and keeps this stock as a Focus Buy.
Yes, China will have growing pains, like any large economy. But for these experts, there’s not enough pain to give up the gains from this emerging giant.
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