Two companies could be beneficiaries of China's most recent economic stimulus as well as the country likely becoming the engine of global economic growth, Asia Carbon Industries (ACRB.OB) and China Carbon Graphite (CHGI.OB).
With the economic uncertainties in the United States and Europe, China's two largest customers, China has to now continue to build its domestic economy so that it's not as reliant on exports as it's been in the past. At the same time, China can't rely on exports to employ its hundreds of millions of workers, provide job growth, placate its growing middle class, or for that matter strong economic growth.
China's latest stimulus, which was announced earlier this month was focused on infrastructure. It will include over 1250 miles of roads and subway projects throughout the country, as well as sewage treatment facilities, warehouses and ports. These projects, totaling US$158 billion will provide a needed shot-in-the-arm for China's economy and it is hoped will keep the country's economic growth above 7.5% for the year.
It's important to note that this stimulus is not focused on the country's export driven economy, but instead on its domestic economy. The Chinese leadership, while in transition, hasn't forgotten that it's all about jobs, and this stimulus is not only designed to keep workers working, but continue to benefit China's growing middle class.
Two companies that will likely benefit from China's economic stimulus and China's increasing focus on building middle class consumers are Asia Carbon Industries Inc. and China Carbon Graphite Group, Inc.. Both of these companies trade in the United States, and therefore benefit from transparency as U.S. public companies.
It has been widely suggested that China will be the engine that will propel the world out of its economic doldrums. Both of these companies are likely to benefit as China's economy continues to grow. And both companies will likely benefit as the country's latest economic stimulus kicks in.
At the same time, it's appropriate to compare these two smaller cap Chinese companies, with larger cap US companies that are in the same general sector.
Asia Carbon Industries
Asia Carbon Industries' principal product is carbon black, which is primarily used as a key raw material in the manufacture of tires. The future of Asia Carbon Industries' business is tied to the growth of the tire industry in China, and to the growth of China's auto industry as well. It is expected that China will produce slightly under 20 million cars this year, twice the number that will be produced in Japan, and around 30 percent higher than the combined production of Mexico and the United States.
Asia Carbon's shares are currently trading based on a P/E of slightly under 2. Its earnings per share is $.13, slightly more than one-half of the current share price. The company's revenue for the quarter ended June 29, was $13.195 million, which, on an annualized basis, is slightly more than the $49.12 million reported for all of 2011. Despite a downturn in China's economy, which has affected virtually every company in China, the company's net income for the second quarter of this year was $1.87 million.
China Carbon Graphite
China Carbon Graphite is one of the country's leading wholesale suppliers of fine grain and high purity graphite, and a top overall producer of carbon and graphite products.
China Carbon Graphite's shares are currently traded based on a P/E of 3.85, almost double the P/E of Asia Carbon Industries. Its earnings per share are $.12, slightly less than the EPS of Asia Carbon. But the current share price of China Carbon Graphite is $.47, almost double the current share price of Asia Carbon Industries. Its revenue for the second quarter was $11.88 million, less than that of Asia Carbon Industries for the same period. The company's net income was $870,000, slightly more than half of that of Asia Carbon Industries.
Two significantly larger companies, which are not emerging market plays and specifically not Chinese, but U.S.-based companies that are also in the specialized materials sector are worthy of note, Minerals Technologies Inc. (MTX) and Valhi, Inc. (VHI).
While not a pure specialized materials play Valhi, Inc. is involved in a few industries, including its chemical business, which consists primarily of the manufacture and distribution of titanium dioxide pigments. Titanium dioxide is a white inorganic pigment used to impart whiteness, brightness, opacity and durability for applications, such as coatings, plastics, paper, inks, food and cosmetics.
Valhi's revenue is significantly from its chemical business, which resulted in almost 94% of its revenue in the second quarter. The company's P/E is approximately 15.62 and its market cap is over $4 billion.
Valhi, Inc. reported net income of $44.4 million, or $.13 per diluted share, in the second quarter of 2012 compared with $52.4 million, or $.15 per share, in the second quarter of 2011, an obvious significant decline in net income. The company indicated that changes in net income were primarily due to changes in operating results in its chemicals business.
Valhi's chemical business`s operating income for the second quarter of 2012 was $112.4 million compared with $145.9 million for the second quarter of 2011. Valhi obviously was seeing the pressure of global economic conditions, and specifically was impacted by the struggling U.S. economy. Operating income declined in the second quarter of 2012 due to higher raw materials costs and lower sales and production volumes, partially offset by higher average selling prices.
Minerals Technologies Inc.
Minerals Technologies Inc. is a resource- and technology-based company that develops, produces and markets worldwide a broad range of specialty mineral, mineral-based and synthetic mineral products and related systems and services. The company's market cap is approximately $1.26 billion, and its P/E is approximately 17.38.
For the second quarter, Minerals' Technologies' second quarter worldwide sales decreased 5 percent to $254 million from the $268.4 million recorded in the same period in 2011. But, net income for the second quarter was $19.7 million, a 20 percent increase over the prior year.
If one believes at all in "companies that are working in economies that are working," it can easily be argued that both Asia Carbon Industries and China Carbon Graphite are both undervalued and well positioned as basic industry plays on China's continuing economic growth and as beneficiaries of the country's stimulus.
To recap, Asia Carbon's P/E is slightly under $2.00, and China Carbon Graphite's P/E is 3.85. Valhi's P/E is 15.62 and Mineral Technologies is 17.38. Even taking into consideration the "China Factor" as well as the fact that both Asia Carbon and China Carbon Graphite have been subject to what can be best described as the "China Factor," just based on P/Es these two Chinese companies are worthy of consideration.
While both Asia Carbon Industries and China Carbon Graphite seem to be both on a growth trend, it appears that Valhi and Mineral Technologies may be facing a stagnation in their businesses and revenue growth, just due to global economic and business factors. If these companies, due to no fault of their own, can't be perceived as "growth stories," then one has to wonder whether they can continue to trade at the P/Es that they're trading at. This by itself would make the two China based companies worthy of consideration.
I am a strong believer that China's economic stimulus package will work. In that it focuses on infrastructure, basic industry companies such as Asia Carbon Industries and China Carbon Graphite are likely to be beneficiaries. As soon as the regime change in China is completed, there will likely be additional economic stimulus measures taken by the Chinese government. More than likely these will be focused on appeasing China's workers and growing middle class, as well as focused on basic industrial development. These additional stimulus measures, if and when announced should benefit basic industrial companies in China, including China Carbon Graphite and Asia Carbon Industries.
But, metrics are metrics. If one is an owner of either Valhi or Mineral Technologies, and if you're willing to look at smaller-cap companies in emerging markets and specifically in China, with the inherent risks, then Asia Carbon Industries and China Carbon Graphite are worthy of consideration.
If one is an owner of China Carbon Graphite, based on valuation and metrics, then Asia Carbon Industries should definitely be considered as well.
There is no question that investing in smaller-capitalization companies, as well as investing in companies in emerging markets, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk.
In the case of both China Carbon Graphite and Asia Carbon Industries, while definitely both smaller-capitalization companies with operations based in emerging markets, and specifically in China, they are both U.S. reporting issuers, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.
Disclosure: I am long ACRB.OB.
Additional disclosure: I have no position in CHGI, MTX or VHI, but may initiate a position in CHGI in the next 72 hours.