A series of Chinese actions over the last few days mark a resurgence of nationalism in Beijing. First there was the murky saga of the Yves Saint-Laurent auction at Christie's in Paris, over Manchu animal heads made in Europe for the Summer Palace, which are hardly Chinese treasures, and which the country could have bought before the auction for a lower price.
Then there was the standoff in international waters with a U.S. surveillance ship keeping an eye on Hainan Island. The U.S., which I trust in these matters, says China was violating international law.
And on Monday, there was a huge selloff in the final moments of trading in HSBC Bank (HBC), which is British, but also a part of the Hong Kong establishment: issuer of banknotes; key to the index; operator of the index (through its Hang Seng subsidiary); and investment touted by the city's Mir. Big, Li Ka-Sheng.
The nationalism is aimed at the leading countries which might make trouble for China over the crackdown in Tibet. But it is also a diversion for the country whose exports have fallen 26% and whose people face unemployment without a normal safety net.
It also opens up investment opportunities which I will go into below, in the paid subscriber's section.
While China spooked world markets last week by not upping its stimulus package, in fact my firm belief is that "the money will keep rolling in from every side" (to paraphrase Evita). The Chinese ruling Gang of 46 (there are certainly more than 4) fear that growth of less than 8% means unrest among the people of the People's Republic. So there will be stimulus as required.
Our first recommended trade is doubling up on the recommended HSBC 5 1/2% Yankee bond which matures in 2012. The price is now $998 per $1000 face value meaning the yield is about 5.45% after the broker takes his cut; the YTM is about 5.55%. Bargain hard on the spread with your broker, especially if (as in my case) it is itself HSBC. Ticker is 404280AB51.
My second China trade is to double up on WSP Holdings (NYSE:WH) (in fact Wuxi Steel Pipe). It reported good earnings for Q4 but forecast that the economic mess would hurt earnings in 2009. For Q4 it earned 27 cents/share vs 20 cents a year earlier (nipped by new shares out). The net came in up 65.9% at $27.8 mn. All other metrics were also up: gross profits up 68.5% to 56 mn; income from operations up 34.7% to $30.9 mn. The negatives were a forecast of $650-750 in revenues this year vs an actual level of $912 mn last year. Its forecast net at $70-80 mn. It reported margins in Q4 fell to 18.7% from 25.6% a year earlier, blamed on more sales of API (oil) than non-API (gas) drilling pipe, and more sales of green oil country tubular goods (OCTG).
OCTG is a long-term play on the need to drill for oil and gas not just in China, but worldwide. Note that the WH forecasts only cover sales within China, and its international sales are considered icing on the cake. They happen.
Note however that Citi downrated the ultimate OCTG company, Schlumberger Ltd. (NYSE:SLB), to equal weight from buy yesterday.
My third China play is Suntech Power (NYSE:STP). I have lambasted STP's CEO, Dr. Shi, an Austrailian PhD in solar physics, for having nailed down STP's silicon supplies at too high a price last year. However, if inklings coming out of Taiwan are correct, there is a potential future for chips after all, in which case the price of silicon will rise again to the levels STP is paying.
Meanwhile, STP is signing up solar deals using intermediaries in the U.S. A solar power plant in Santa Barbara (CA) with STP panels was inaugurated this week. STP expects to sell 7.2 mega Watts of solar facilities in the U.S. this year, thanks to a deal with Third Rock of San Francisco, also announced this week.
But my main reason for buying more STP is a conversation Wednesday at the lovely MOMA dining room with a highly respected Loomis Sayles bond analyst, Dan Fuss. Fuss, quite out of the blue, mentioned his recent flight from sunny Tokyo to smoggy Beijing and tipped "opportunities for private long term investment in solar in China." He added: "the sun must have been there somewhere" about the winter mist which burns your eyes, now in full flare-up after the Olympic cleanup. The opportunity of course is not for the open-end bond funds he manages, but for equity investors.