To play it, Cramer doesn't recommend investing directly in individual Chinese companies, but rather the iShares FTSE China 25 Index Fund,(FXI) exchange-traded fund. The FXI owns a basket of what Cramer considers "the highest quality Chinese companies," including oil and gas companies such as CNOOC (CEO) and PetroChina (PTR). Most investors know the biggest three Chinese oil companies: PetroChina, CNOOC and China Petroleum & Chemical Corp. (SNP). These three companies are well-known to investors and are worthy to look at for the long run.
An other interesting oil company which should be mentioned is Longwei Petroleum Investment Holding (LPH). This company is widely followed by retail investors in the U.S. and Europe. It is an undervalued Chinese oil company that trades at a significant discount to the big three.
Recent economic indicators show that the Chinese economy has stabilized and expects higher growth in the fourth quarter of 2012: "Now is a critical point for the country's industrial economy. Positive factors are accumulating," said Zhu Hongren, Chief Engineer of the Ministry of Industry and Information Technology. The PRC also surpassed the United States as the world's largest recipient of global foreign direct investment in the first half of 2012, showing that global investors have confidence in the world's second-largest economy. China Daily (October 26, 2012).
PetroChina is the largest oil and gas producer in China. The company is engaged in a range of petroleum-related activities through its four segments: Exploration and Production, Refining and Marketing, Chemicals and Marketing and Natural Gas and Pipeline.
PetroChina's Q3 net profit was below market expectation. The weak set of results is due to refining losses, weak performance of the chemical division and controlled retail fuel prices.
The management expects the outlook for the global economy recovery would remain sluggish and tortuous for the rest of this year, as the euro crisis spreads and growth slows in China. It appears unlikely that the natural gas pricing reforms will be implemented in 2012.
Trading at a P/E below 10 for 2013 and a 4% dividend yield, we are looking at a valuation that is not expensive in terms of absolute value.
CNOOC Ltd is the third largest oil and gas company in China. The company has four major oil production bases: Bohai Bay, Western South China See, Eastern South China Sea and East China Sea. It has also operations in Indonesia, Africa and Australia.
As a listed operating subsidiary of the China National Offshore Oil Company [CNOOC], it has exclusive rights to negotiate for offshore production sharing in China with international oil companies. This is very favorable to CNOOC, especially if the China Sea area continues to have strong discovery in oil and gas. According to the company's latest guidance, it will continue to grow at a Compound Annual Growth Rate between 6-10% to 2015.
Third quarter production numbers were encouraging. In the last 12-18 months, the company has made 23 new discoveries and 47 successful appraisal wells. After muted production growth in 2011-2012, CNOOC expects production growth to resume in late 2013-2014. The possible acquisition of Nexen (NXY) will increase production by 20% and helps CNOOC to diversify its reserves geographically.
China Petroleum & Chemical (Sinopec)
China Petroleum & Chemical Corporation refines, produces and trades petroleum and petrochemical products such as gasoline, diesel, jet fuel, synthetic fibers, chemical fertilizers and some other products. The company also explores for and produces crude oil and natural gas in China.
Q3 net profit was down 9% year-over-year and up 65% quarter-over-quarter, above market expectations.
While the continuing improvement is likely for the refining and chemical division, Q4 should be better than Q3. The company is trading around a P/E of 7.5 for 2013. Close to the high end of its historical trading range. The dividend yield is above 4%.
Longwei Petroleum Investment Holding
Longwei Petroleum is an energy company engaged in the storage and distribution of finished petroleum products in China. The Company has a storage capacity for its products of 220,000 metric tons located at three storage facilities within Shanxi: Taiyuan, Gujiao and Huajie, which have an individual storage capacity of approximately 50,000 metric tons ("mt"), 70,000mt, and 100,000mt, respectively. The Company has the necessary licenses to operate and sell petroleum products not only in Shanxi, but throughout whole country.
With a P/E below 3 in 2013 and the possibility that they are going to declare dividends next year this stock is a gem that is going to shine soon. I am still thinking that they could go private if their valuation doesn't change to the positive side.
From the big caps CNOOC has the best forecasts, so I would consider that one as a buy. If you like dividends you could choose for PetroChina or Sinopec.
From a valuation point of view I would advise Longwei.
|Book Value p/share||91.06||102.00||90.30||3.47|
|Cash Value p/share||10.61||41.41||2.58||0.14|
|EPS 2013 Est.||14.36||23.35||13.76||0.86|