Making the case for Chinese stocks
Is the Chinese bubble about to burst? No, says a U.S. expert who retains his optimism for Chinese stocks and backs it up with four buys.
China seems to be worrying a lot of people these days.
The Chinese economy, at any rate. The People’s Bank of China has been acting as though it’s trying to rein in a runaway horse.
A month ago, it sold 3-month bills at the highest interest rates in five months. Many concluded this was just the first step in a tighter monetary policy. Surely a serious rate hike is just around the corner.
Is the Chinese bubble about to burst?
No, says one U.S. expert. China has no intention of letting its economy get out of hand, asserts Mr. Yiannis G. Mostrous in Personal Finance.
It is changing. Earlier today, president Hu Jintao called for “no delay” in transforming the nation’s economy to greater self-sufficiency, reducing its dependence on exports and building up service industries, consumption and technology.
But such a transformation is only possible in an economy that is already strong. Last year, it grew by 8.7 per cent.
Mr. Mostrous, who also edits The Silk Road Investor, gave us a positive take on the Chinese stock market three months ago (see Daily Buy-Sell Adviser, November 6, 2010).
He hasn’t changed his mind since, despite the anxious signals from the People’s Bank. And he has four buys to back up his confidence.
The main beneficiaries
China is bound to start tightening the money supply later this year, Mr. Mostrous admits. But it will not rush in precipitously. “China’s leadership has made it clear that it will withdraw liquidity gradually; destroying market confidence isn’t an option.”
In fact, he says, it would like the U.S. Federal Reserve Board to take the first step in raising interest rates, although this may not be feasible.
“Yet the longer it takes for the Fed to hike rates, the more incentive investors have to buy the main beneficiaries of loose monetary policy: Asian assets,” says the author.
Asia’s main economies are still benefiting from strong demand and solid growth, he adds. Their currencies may strengthen as money flows in from around the globe. And investors “should focus on stocks that benefit from domestic demand.”
A command economy
There will be an asset bubble in Asia eventually, but this is a long-term concern, insists Mr. Mostrous. And in a command economy like China’s, where the government controls the levers, it is less likely to materialize.
Emerging markets have been beating the MSCI World Index for four years and there’s no reason to believe they won’t do so again in 2010. Meanwhile, Asia as a whole offers a dividend yield of 2.2 per cent, 10 per cent higher than the average yield on the S&P 500 Index.
An Asian correction can’t be ruled out, says Mr. Mostrous, looking at the inter-connected world financial markets and the troubles in Europe. But he insists an Asian sell-off would be a great long-term buying opportunity.
“Success in 2010 will come to the agile investor who takes measured risk,” he concludes. And he has four stocks for that agile investor.
250 million insurance policies
China Mobile (NYSE-CHL) is a holding in this advisory’s Growth Portfolio. It has a subscriber base of over 300 million and generates more than 80 per cent of China’s total revenue in the mobile phone business.
In fact, the stock declined 5 per cent in 2009 as investors jumped on cyclical stocks. Facing fiercer telecom competition, the company doesn’t generate revenue as easily as it once did, but it still leads the pack.
But that puts it at an attractive valuation for long-term investors, says this analyst. And it’s a solid income producer — it yields 3.6 per cent on a dividend of $1.74. He has it as a buy up to US$60. It trades today at $47.33, almost exactly where it was when we visited Mr. Mostrous’ recommendations three months ago.
An insurance company with policies in the hands of 250 million people would monopolize the market in any western nation. It gives China Life Insurance Company (NYSE-LFC) 40 per cent of the domestic market.
That still makes it the largest insurance company in Asia outside of Japan, and the sixth largest in the world. The insurance business is growing rapidly in China along with the nation’s economy.
But there is still an enormous amount of room for growth, especially in rural areas. A buy up to US$82, the stock trades at $64.70. It yields 0.7 per cent on its 51¢ dividend.
A juicy dividend yield
Returning to the telecom business, we find Chungwa Telecom (NYSE-CHT), the largest fixed line or landline company in China. It also has a large hand in the mobile and broadband markets.
Chungwa does what a utility is supposed to do — supply a juicy dividend yield. In this case, it is 6.3 per cent on a dividend of $1.16.
But it will also grow as it expands its broadband business, says Mr. Mostrous. The stock is a buy up to US$20. Today it trades at $18.32.
What does an increasingly affluent population do? Head for the mall. Renhe Commerical Holdings (OTC-RNHEF) is developing underground malls in prime commercial areas of China’s leading cities.
Many of these spaces were once civilian defense shelters in times of conflict. Because they are free of land-use regulations, the company doesn’t have to pay huge premiums up front.
This has allowed Renhe to achieve strong profitability and build up a nice store of cash. Plus it trades at just 8 times forward earnings. Mr. Mostrous likes the stock up to US$1 on the Over the Counter exchange in New York. Right now, it’s at $0.22. It doesn’t pay a dividend yet.
Yes, the galloping Chinese economy offers its share of risks for investors. But there is a legion of experts out there who are convinced that it’s not a matter of whether China will have the world’s most powerful economy, but when.
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