by Neil George | November 11, 2009 12:41 pm
The fall of the Kuomintang or the Nationalist Party of China and the founding of the Peoples Republic of China in 1949 was met with horror for many in the U.S. And since then, China has remained as the last major world power that is considered by those same folks as threat to the free markets of the world.
But for those that actually travel to, live and/or work in China, the history of the past 60 years shows that labeling doesn’t cut it when it comes to business. I’ve had the privilege of doing all three over the past two decades, and I continue to be in awe of the drive by China to be as economically productive and successful as possible.
3 Reasons Why China Stocks Still Have Plenty of Room to Grow[1]
Over the past 30 years, the Chinese economy has expanded at a rate that’s just shy of three times that of the U.S. And while many critics might argue that the growth has come on the backs of cheap labor and uneven expansion throughout the nation, the growth has continued to soar with gains of over 5000% during the past three decades and continues to accelerate, with the past five years seeing an average annual rate of over 18%.
What’s more, wages keep soaring. Average wage gains continue to climb at a rate exceeding 16% steadily over the past several years, advancing over 18% last year alone.
Not bad for a bunch of so-called commies – right?
Then there’s the local stock markets. Over the past decade, as the S&P 500 has lost 18%, the three major exchanges of China have all delivered returns in excess of 100%.
Bonds? China has come through with a whole new level of credibility. Over the past five years, benchmark government bonds have turned in returns solidly in the 30% range in local currency terms. A massive build up of reserves, controlled spending and budgetary management along with a quest to control inflation has given the nation massive credibility in the bond market.
Then there’s the currency. The stock of the country as I’ve said for years – the renminbi (CNY) — has been moving upward against the U.S. dollar since the last major fixing in the summer of 2005 by some 18%.
And all of this has come with the hand of government. For businesses, dealing with the government really is not much different than back in the U.S. Both nations have a host of regulations, procedures and permits along with taxes, but perhaps the difference comes in that in China, the hand of government can really move mountains for the right companies.
Earlier this year I had the opportunity to see a prime example of how government works in China. In Xinyu, China in the Jiangxi province southwest of Shanghai, LDK Solar (LDK[2]) wanted to build its first and the world’s largest polysilicon production and processing facility.
Polysilicon is the principal material in the manufacture of solar cells, and LDK is one of the leaders in this industry.
The site literally was raw ground. In fact, it was actually on a small mountain. The project needed to be done swiftly and with massive assistance by contractors and the national and local governments.
In other nations, this project would have never been able to be finished for years. But not in China. Just 20 months and as of September 17th, the plant is up and running. And if you’re thinking that it was just about local jobs and local contractors, guess which company did the project?
Fluor Corporation (FLR[3]) right out of Irving, Texas.
China is all about business. And it will allow companies to build and thrive as long as they’re legit and productive for the economy. Stay on the right side of China, and the government’s hand can be exceptionally helpful.
So where to invest in China now?
China recently rolled out its first major series of renminbi bonds specifically for foreign investors. While many U.S. brokers might give you a hard time over these, they are out there, and you can be part of the initial subscription process that just kicked off and is good through most of this month.
One of the issues is the China Government Bond (CGB[4]) with a 3.3% coupon due 10/27/14, trading at a minor discount around 99.75. Not much yield at around 3.4%, but you will own renminbi via a government bond trading internationally.
Other means of generating cash flows from income investing in China as well as other strategic regional markets is a long-favored fund of mine – the Matthews Asian Growth and Income Fund (MACSX[5]). Run by an friend of mine, Paul Matthews and his team over in the Embarcadero Center in San Francisco, it has consistently come through with above-market dividends and overall returns averaging over 14 % annually for the past 10 years.
For industry and company specific plays, I like BYD (BYDDF[6]), a Shenzhen-based company that focuses on batteries for everything from smart phones to cars. Warren Buffett currently controls 10% of this company through Berkshire Hathaway (BRK-A[7]).
Sales are climbing at an average annual rate of over 26% and despite heavy investment in development, return on equity is just under double-digits. And while plenty of tech stocks faltered last year – not BYD, which continues to climb over the past few years by an average annual rate of 100+%.
I also recommend Advanced Battery Technologies (ABAT[8]), a specialist in lithium ion battery technology — crucial for automobiles. ABAT has offices in New York and is listed in the U.S. market and has its primary facilities in Shuangcheng City as well as in Beijing.
Revenues for ABAT keep climbing even higher than it’s peer BYD, at a rate of over 41%. And even with massive investment in research and development, return on equity is currently over 28%, all with fat operating margins in the 40+% range.
ABAT’s debt is negligible. And the company has a long history in the U.S. market running back to the early 90’s, so it’s been well stress-tested, having survived and thrived through the tech bust and credit bust of the past many years.
The environment is another major government-assisted market that’s prime for your investment.
One particular focus involves water treatment and processing. And one of the local leaders in providing equipment and supplies for water treatment and processing is Beijing-based Duoyuan Global Water (DGW[9]). DGW has had excellent results, with gains just shy of double-digits continuing its past year’s strong market outperformance.
Neil George is editor of Stocks That Pay You[10].
Dividend Stocks[11]
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