Q&A with David Riedel, China Investment Opportunities (Tues Feb 18, 2008)
What are some of the big trends currently in the China market?
With regard to China today, I think U.S. investors need to recognize that the most recent heavy weather during January and February had a big impact on China's economy and the China investing situation, much more so than I think a lot of people realize.
What has happened with regard to the weather? It was the heaviest snowfall and most severe winter weather in almost 50 years. It really paralyzed Chinese transportation towards the end of January and going into the first weeks of February, which was right at the time of the lunar New Year, the big Chinese travel season. Imagine that the entire transportation system in the U.S. was frozen during Thanksgiving, even more severe than that. It's really the big travel period for Chinese individuals. This not only impeded individuals' travel, but also the transportation of energy supplies throughout the country, and really highlighted the precarious situation the Chinese energy grid finds itself in. How so? Fifty percent of Chinese electricity comes from coal-burning power plants. The country imports a tremendous amount of coal, and they consume about 2 million tons a day. They consider it an emergency if reserves are at about 14 million tons. A few weeks ago they were at 17 million tons, so a couple days away from a real emergency situation. That's because they were unable to transport coal around the country and from the ports, and there's been a huge spike in coal prices because of some flooding in Australia. It's a long-winded way of saying that continued economic growth in China has really strained their energy situation, and the heavy weather in January and early February highlighted that fact. How can individual investors play this trend? One of the ways individual investors can play this trend is through a name that we highlighted to investors over a year ago now, which is Yanzhou Coal (YZC). YZC is a coal mining and coal distribution company that has seen the demand for its products skyrocket. The prices at which coal can be sold have gone through the roof, and in turn YZC's stock has almost tripled since May 2006. It has been a tremendous performer for subscribers to our China Investment Opportunities Newsletter. And you expect that to continue? Yes, I think the news flow out of China in the next few weeks is going to evolve around their efforts to rebuild their reserves of coal and iron ore around the country, and so you're going to continue to see pressure on those two commodities and especially globally. Investors who are nimble with their investments over the next few weeks, I think, can benefit significantly from those opportunities, and I'd definitely focus on YZC as a great way to play that. ------------------------------------------------------------------ Get the scoop each month on the best China stocks to buy from the former head of research in Asia for Salomon Smith Barney! +60% Annualized Returns – Rated Top Stock Picker in Q1 by MarketWatch.com! Featured in Barron's, New York Times & Wall Street Journal! Sign up for the FREE 30-Day Trial today! What other opportunities are you seeing? One of the things we've focused on in our newsletter is the opportunity in the consumer sector in China. We've spoken about Focus Media (FMCN) and about some of the telecom companies. Many of those companies are going to have a short-term earnings impact from this heavy weather. Especially the telecom guys are going to have a lot of maintenance expenses related to repairing the damage from this heavy weather to their networks. So I think we will see margins compress with some of the mobile and fixed line players in the next quarter or two. So investors should wait to jump on these? That's right. I think investors need to realize that there will be buying opportunities in some of these names, which trade at pretty hefty valuations, companies like China Mobile (CHL) and China Unicom (CHU). The near-term impact on margins will be reflected in the next couple of earnings announcements, and that might be an opportunity for investors to add those to their portfolio to take advantage of long-term trends, which are very positive. How about shorting opportunities? Shorting in China is a dangerous game. People have consistently found that even when things have had high valuations, the China growth story is so strong that those stocks have continued to go up and to justify those valuations by really putting the growth numbers out. Our subscribers to China Investment Opportunities have the chance to really get to know an individual story through the detailed work that we do, and identify what their buying points are, and really sit and wait until those buy points are hit. But I really wouldn't recommend people going short individual stocks in that market. What about investing in China ETFs? We really believe that 2008 is going to be a period for stock selection rather than buying whole indexes. Investors who take the time to understand the earnings drivers of a particular stock and the valuations of a particular name are going to do better in a volatile environment that we expect 2008 to provide than people who are buying baskets or indexes. I think that a well-constructed portfolio of a few names in China -- a few industrial names, a select few consumer names -- will outperform and provide a better opportunity for the individual investor than ETFs for 2008. Any parting shots? I would continue to stay underweight in the financial services sector in China. We believe that while the sub-prime crisis will have a limited impact on Chinese banks as a whole, I think that's not your best performance area. We've seen this in our work on the global emerging markets year to date, that it's not the best place to be in 2008, just because of negative news flow globally. So I think that while the Chinese economic situation is robust and banks are typically a good way to play a strong economy, I think 2008 is a year to take off from investing in banks and financial institutions. I'd focus on industrial and consumer more than on financial. Fluent in Chinese and Thai, David Riedel has been active in Southeast Asian equities since 1992, including eight years with Salomon Smith Barney as a telecom analyst in Thailand and small-cap analyst in New York. He now runs New York City-based Riedel Research Group specializing in Asian equity research for institutions, and is editor of China Investment Opportunities, a monthly newsletter that gives retail investors an opportunity to access his institutional-quality research on China. Sign up for the FREE 30-Day Trial today! David does not have a position in stocks mentioned in this article.
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