China Infrastructure $600 Billion Stimulus Windfall Profits for Investors
Stock-Markets / Chinese Stock Market Feb 06, 2009 - 04:23 AM GMT
Two weeks ago I talked about the U.S. infrastructure spending that's soon going to hit the economy and how it will benefit a handful of companies.
Today, I'm going to talk about an even greater windfall for savvy investors. That is, investors who don't stick their heads in the sand.
I'm talking about China's massive infrastructure program: More than $600 billion that will be invested to boost the standard of living in China's rural areas.
Look. I don't deny that China's having its share of problems as a result of the global financial crisis. It is. Growth has slowed, to sub-8% GDP.
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| China's banks are now the strongest anywhere. In fact, Chinese banks total assets jumped 18.6% in 2008 to $9.1 TRILLION — almost equal to the entire GDP of the U.S. |
But that's still multiples higher than any other country on the planet!
Plus, China's banks are now the strongest anywhere. In fact, non-performing loans, or NPLs, fell by $102 billion in 2008 to $83 billion … just 2.45% of the total loans outstanding. That's amongst the lowest NPL ratios of any country.
Moreover, Chinese banks' total assets jumped 18.6% in 2008 to $9.1 TRILLION. In other words, its bank assets are equal to almost the entire GDP of the U.S.
And despite all the gloomy talk on China,
There Are Plenty of Signs of The Economy's Resilience …
- Consumer spending during the Lunar New Year holiday, which ended last week, rose 13.8% over last year.
- Grocery store sales were up a whopping 23% during the week-long New Year holiday. And …
- Sales of household electric appliances jumped 17.8%.
- For all of 2008, retail sales rose a very healthy 21.6% , versus 16.8% in 2007.
- Despite a slowdown in exports, China's industrial output grew 12.9% for all of 2008 , while …
- Fixed asset investment surged 25.5% , up from 24.8% in 2007.
- Despite the slump in the stock market and lower capital gain revenues, overall tax revenues contributed to a 19.5% surge in China's fiscal revenues in 2008. Proof positive that China's economy remains robust.
And that's not all …
- Despite what all the doomsayers are claiming, China's economy created 11.13 million new jobs in 2008!
I suspect that's going to be a drop in the bucket compared to the job creation we will see in the years ahead as $600 billion gets invested largely in rural infrastructure.
In fact, according to the China Banking Regulatory Commission (CBRC), that $600 billion will stimulate $2.9 TRILLION in total lending that will be pumped into the rural economy in the next 12 years.
That will open the floodgates, not only for the banks that will provide the lending, but for companies involved in irrigation, clean-water systems, power plants, roads and highways, rail lines, home and business construction, medical facilities, and more.
Below are some of the companies on my radar screens that I'm keeping my eye on. Note: Some are traded in Hong Kong. For more info on these companies and how to invest in Chinese stocks, be sure to follow my signals and instructions in my Real Wealth Report …
- Anhui Conch Cement (AHCHF.PK). Anhui is China's biggest cement maker. Based in Beijing, the company produces and sells various types of cements used to build structures, power plants, roads and more. It has focused its efforts on developing the western region of the country.
According to the latest data, the company's net profit in the first nine months of 2008 rose 34.27% year-on-year while operating revenue rose 28.55%.
The company is expanding in Sichuan to help build the 175,000 homes that are under construction there, and is investing 17 billion yuan to add 50 million tons of annual capacity in western China over the next five years.
Anhui is one of several companies chosen by the government to receive preferential treatment in securing credit for expansion projects as well as for mergers and acquisitions.
I believe this company is in a great position to rake in some serious profits as it provides its services and products in China's rural areas.
- China Communications Construction Company Ltd. (CCCGF.PK). A transportation infrastructure company that's also involved in dredging and port machinery manufacturing. It is China's largest port, road, and bridge construction and design company. It has also played a large role in the design and construction of several railway projects in China.
China Communications Construction Company is in line to become a big recipient of development projects in the west of the country.
- China Mobile Ltd. (CHL). This huge telecommunications company services China's 31 provinces, autonomous regions and administered municipalities in Mainland China and Hong Kong.
With more than 457 million subscribers, China Mobile is the largest telecommunications company in the world and continues to experience double-digit subscriber growth rates — 20% in the first 10 months of 2008!
- New Oriental Education & Technology Group (EDU). Chinese people are known for placing a lot of importance on formal education. As the rural areas are developed, New Oriental should see a boom in students as it expands to the countryside.
Already, China produces more engineers (400,000) annually than Japan (200,000) and the United States (60,000). Its students are getting increasingly competitive globally for the limited spaces in top institutions. Companies like EDU aim to capitalize on this and tailor their services to an increasingly affluent populace that places great importance on education.
New Oriental Education & Technology specializes in university admission assistance to students and also trains its students in foreign languages.
EDU has a quarter billion dollars in cash and no debt. Its five-year earnings growth rate: 69%. Net profit margin: More than 37%.
- China Railway Group Ltd. (HK: 0390). Hong Kong-listed China Railway Group stands to reap huge profits from Beijing's budget to invest more than $4 billion in 150 railway projects over the next three years.
- ABB Ltd. (ABB). Zurich-based ABB Ltd is one of the world's leading electrical power engineering companies. Operating under five segments, the company has operations in more than 100 countries.
ABB's work in China dates back to 1907, so the company has extensive experience and relationships there. Its major presence in China is through its power systems division, which serves electric, gas and water utilities, as well as industrial and commercial customers.
Its most-recent contract with China (September 2008) is a $36-million project for a new solar products manufacturing plant in Xinyu City. ABB will be the main electrical contractor and will provide all systems, equipment and related engineering for the project.
What About China's Stock Market?
It reminds me of 2002, when the world was fixated on potential horror stories in China's economy and clueless about the reality in China.
Back then, I told my subscribers to buy with both hands. And what happened? The Shanghai Composite soared more than 300% in the ensuing five years.
Today, what you're hearing about China … tales of the rural areas going through an uprising, derailing growth, protests in the countryside, banking problems, bad loans, a slowing economy, etc. — are almost as far from the truth and reality as they were back in 2002.
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| As $600 billion gets invested largely in rural infrastructure projects, I expect to see the Shanghai Composite TRIPLING. |
My forecast remains firm: I expect China's stock market to head substantially higher this year; retracing at least 50% of its 2008 decline and pushing the Shanghai Composite to as high as 3,700 — from its current 2,000 level. And within the next three years, I see the Shanghai Composite TRIPLING.
Bottom line: China is one area of the world you should consider buying into.
In addition to the above stocks, also consider my two favorite China plays: The iShares FTSE Index (FXI) , an ETF that tracks China's Shanghai stock market, and U.S. Global Investors China Regional Opportunities Fund (USCOX), a mutual fund that invests at least 80% of its money in the China region.
Best wishes,
Larry
P.S. Be sure to check out my blog between my weekly Money and Markets columns for my thoughts on what's going on in the markets. And you can interact with me directly by leaving a comment.
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