Three Ways to Profit from a China-France Alliance

France and China are - let’s face it - natural buddies.

France has traditionally looked for a political counterweight to the United States, and China is beginning to provide one. China wants to keep the European Union from aligning against it, and France is the EU’s guiding spirit - even if it’s no longer its largest economy.

France has strengths in some of the high-tech and heavy industry sectors that China needs. And the European nation also boasts the world’s most-sophisticated array of the luxury goods that newly wealthy China consumers now crave.

On the other hand, China has cheap consumer goods that don’t compete directly with French-made products, which means France can allow China to sell them in the European market with no fear of losing market share. Indeed, France will even promote the benefits of trade to EU consumers, so long as it sees a good amount of trade going back the other way.

Clearly, the two countries compete very little, meaning they have many avenues for cooperation. Still, while Chinese products represent 5.8% of French imports, China could buy more from France, which represents only 1.4% of Chinese imports.

All this set up a recent and successful meeting between France President Nicolas Sarkozy and Chinese officials, after which the newly elected Sarkozy signed $30 billion in contracts for French companies.

For France, these contracts are huge because they open revenue channels that are away from the EU - which is trying to keep from being capsized by the waves of the U.S. credit crisis - and that are actually inside the fastest-growing economy in the world.

For investors, those contracts also opened three interesting investment opportunities. Here’s a breakdown of each:

• First, there’s Areva (ARVCF.PK), the world’s largest builder of nuclear power plant reactors, which now is building two new reactors in conjunction with China Guangdong Nuclear Power Group. The contract, which totals $12 billion, also includes a 10-year agreement to buy uranium from UraMin Inc., a uranium producer owned by Areva. Regrettably, you can’t buy Areva directly because it’s owned entirely by the French government. However, don’t despair: The company has issued investment certificates - which have all the rights of ordinary shares except the right to vote - listed on the NYSE EuroNext, and through the Pink Sheets on the U.S. over-the-counter market. As a U.S. retail investor, you probably don’t want to vote in a French company’s shareholder election anyway, but the company is pretty expensive at about 41 times trailing earnings.

• Sarkozy’s second big deal was the sale of 160 commercial passenger jets (110 A320s and 50 A330s) by Boeing Co.'s (BA) arch nemesis Airbus SAS, in a contract totaling $15 billion. When French charm and a natural geopolitical alliance come together, it doesn’t matter that the euro is hugely overvalued against the dollar at $1.47. Airbus is a unit of the Franco-German defense-aerospace giant EADS NV (EADSF.PK) [again, listed on Pink Sheets]. Unfortunately, EADS’ P/E ratio is infinite, as the company is currently operating at a loss. Maybe that one’s not such a hot investment opportunity.

• The third big deal was $1.1 billion of contracts for telecom giant Alcatel-Lucent (ALU) to expand the mobile networks of China Mobile Ltd. (CHL) and China Unicom Ltd. (CHU). Alcatel-Lucent is pretty much a blue chip and its China deals, while smaller than those of Areva and Airbus, give every sign of being solidly profitable. The company had a rough year in 2007 and its stock is very cheap at a recent price of $6.44 - its lowest price in nearly five years. How much the China deal impacts profit and investor sentiment makes it a speculative play.      

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