The Difficulty of Investing in China

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From the standpoint of my articles being about sharing process, I find the current state of the China investment theme to be particularly difficult right here. As disclosed previously, I had close to across-the-board exposure to China with Sinopec (SNP), charted in red, that I first bought in 2004. I sold the last of it last May over concern that the run would soon come to an end. I did not use a stop order because, at the time, the day to day movement did not, in my opinion, lend itself to stop orders.

The sale was good in that older clients made 2 1/2-3 times their money. The sale was so-so, except I was a few months early. The sale was bad, because while I sold at $103, it peaked out at $178. (The point I am making: There are many ways to look at a sale). Sinopec closed yesterday at $96.26.

What makes it difficult is that many things related to China are down a lot; the Shanghai Composite, charted in blue, is down about 30% from its peak in October, which is a lot. But there doesn't seem to be any recognition of the decline, and I can't recall any what's wrong with China articles or TV segments. There was virtual panic (slight exaggeration) when the U.S. market was down 5%. China is down 30% and very few, if any, people seem to care.

Down 30% is not the worst place to initiate a position, because often people start to give up at about that level, which is why 30% is about the average size bear market decline in the U.S. But if China is down 30% and no one is even miffed, holding off seems right. That is what makes this a tough call.

Just so no one gets confused, I am talking about the price of stocks, not the story on the ground in China. I have been convinced for years now that China is a huge story and could easily supplant the U.S. in being the globe's big Kahuna. But none of that makes it immune from bear markets. The stock I want to buy is not down anywhere near the 46% that SNP is down. It is though down noticeably and, like I was saying with financials the other day, I feel good about where the price will be 36 months from now. Three months from now though is tougher to see.

This hopefully shows that it is ok to not know. No one can know everything. There cannot be perpetual clarity with everything. I think I am reasonably well in touch with the theme (stocks going down, CPI going up, GDP going down, yuan going up, the magnitude of importance of the Olympics) but for now I don't feel like I have solved it just yet. This has happened with other things in the past and will happen in the future. It is normal.

Comments

[Lisa:]

Roger, if the time comes that you are comfortable buying, which Chinese stocks are on your hit-list?

2008 Mar 13 11:20 AM

[gebby:]

if u are looking out 36 months and worrying about only 3 mos. it is time to buy.

2008 Mar 13 11:56 AM

[Martip1:]

Roger:

Does the Olympic economic impact occur prior to, during, or after the actual event?

2008 Mar 13 12:32 PM

[fjd10595:]

I have shorted it here. Down 30% and no one is talking abou it- that tells you it is going lower, inflation and the currency are going up, and their exports will fall with the US economy. I say it is lower 12 months out.

2008 Mar 13 01:19 PM

[Roger Nusbaum:]

Lisa, i can;t front run my clients but bigger picture i am more interested on accessing the internal ongoings there as opposed to an exporter.

Gebby, one thing that is a part of my world is taking client emotion into account. Additionally i recently added some EM exposure with Chile on 12/19 which has been a lucky buy but don;t want A LOT of EM quite yet.

Martip1, I played the Greek olympics in 2004 with OTE in late 2003 until spring 2004. I think the 2008 olympics has less stock market relevance and more sentiment influence and reconciling what the means has not been easy, if this were a Greece rerun the stocks would be doing great right now.

fjd, that your comment could turn out to be right is exactly why clarity eludes me right here.

2008 Mar 13 02:44 PM

[Ames Tiedeman:]

Like many I find myself waiting for a massive correction before buying a China Fund. the problem is, the correction never seem to be deep enough or to even come. Some suggest that after the Olympics the market will drop. Perhaps they are correct, perhaps not. One would think that China would want to make such a grand presentation to the world that many would elect to invest in Chinese securities.

2008 Mar 13 02:59 PM

[Loungin:]

I'm a PE guy and think in terms of EBITDA multiples. If you just look at the fundamentals of FXI's holdings (finance.yahoo.com/q/hl...) the average EBITDA multiple was 9x at the end of Feb when it was trading at 145. FXI prices have contracted 10%+ since then. Hell, we pay 8-10x for businesses in the U.S. in the PE world all the time, and that's the private sector. For public stocks to be trading in that range (a lot lower now due to contraction) in a super high-growth country such as China is crazy. I would buy that all day long. Companies in the states trade at 10x+ and they are in low to medium growth sectors. I continue to buy JAN 2010 FXI calls at 140 as the price continues to fall. I think it's a bargain, despite the olympics, inflation, etc. If our fund had the opportunity to buy diversified, high growth companies at 8x EBITDA we would be all over it.

2008 Mar 14 04:38 PM

[Roger Nusbaum:]

Those call options closed offered at $24.20, I am surprised by the continual buying at the strike but maybe you are on to something, no idea.

I can't vouch for your EBITDA numbers, I do know the plain PE a few days ago was 33, down from 43 (both numbers from Bespoke) which strikes me as very high in general but especially so considering that 41% of the fund (per ETFconnect) is in the financial sector.

I could be wrong, China could be a screaming buy here but I disagree that fundamentals look cheap.

2008 Mar 14 06:12 PM