This past week, Jim O'Neill, Chairman of Goldman Sachs Asset Management, and the person who created the acronym BRIC for Brazil, Russia, India and China, made headlines. O'Neill stated that the time to buy Chinese equities is now. I've been saying the same thing in my articles here at Seeking Alpha.
As outlined in an article written by Steven Orlowski at Emerging Money, O'Neill, identified factors that led him to his conclusion. These included:
- China's M2 money supply growth having accelerated to 14.8 percent in September which resulted in the Chinese Financial Conditions Index (FCI) easing, which O'Neill indicated is a positive sign for future growth.
- The country's trade balance coming in at a high of almost $28 billion for September, with stronger than expected exports growing at a 9.9 percent rate.
- For the first nine months of this year, China's trade surplus approximating $150 billion, or about 2.5 percent of GDP, an amount that is one quarter of its level before 2008.
- Inflation, as measured by China's Consumer Price Index (CPI), rising by 1.9 percent year-on-year in September. This is significantly less than the People's Bank of China's 4 percent target for all of 2012.
- A 3.6 percent decline in China's Producer Price Index (PPI), which O'Neill indicated "suggests that near-term future inflation is not a risk. Inflation will probably ease further which, amongst other things, will continue to boost real Chinese income growth."
- GDP for the third quarter of this year rising 7.4 percent year-on-year, which is in line with expectations. For the first nine months of this year China's GDP has risen 7.7 percent.
O'Neill also stated that China's growth for this year would be in the 7.7 to 7.8 percent range, which is consistent with recently released projections made by the International Monetary Fund (IMF).
O'Neill was quoted as saying,
"Premier Wen said it looks as though China will easily meet their 7.5 percent 'target' for 2012. In fact, they will probably exceed it slightly. Not bad, eh?"
O'Neill indicated that other factors that affected his decision to announce a "buy" recommendation for Chinese equities included stabilization of housing prices, Chinese consumption rising as a percentage of GDP, inflation below the government's target and a trade surplus that is a quarter below its peak.
Longwei Petroleum Investment Holding Limited (LPH)
I have been identifying Chinese companies whose growth is tied to the growth of China's domestic economy. I believe that Longwei Petroleum Investment Holding Limited is one of those companies, and a company that is worthy of investment consideration.
Longwei Petroleum is based in Taiyuan City, in China's Shanxi Province. The company's business consists of the storage and distribution of petroleum products, primarily within the province.
Shanxi Province is the leading coal producing region of China. The province lacks oil reserves, pipelines and refineries. All petroleum products have to be brought in by rail or truck from refineries located in neighboring provinces or located in more distant, coastal China. The province's industrial and consumer base is dependent on the timely delivery of petroleum products, which provides an excellent platform for Longwei Petroleum's future growth.
For its 2012 fiscal year, which ended on June 30th, Longwei Petroleum's revenues increased 6 percent to $510.6 million, and the company's net income increased 4.1 percent to $65.1 million. The company's diluted earnings per share for the year were $0.61, a slight decline from $0.62 per share for the prior year. The company's market cap is $226 million and its PE is 3.29
The company indicated that its product sales volume, based on metric tons, for July and August showed an increase of 17.9 percent, and approximated 75,000 metric tons. This compares to 64,000 metric tons for the same two month period last year.
On September 26th Longwei Petroleum acquired the assets of Huajie Petroleum Co. for $110 million. The acquisition was accomplished using internally generated funds. The assets that were acquired consisted of a fuel storage depot with 100,000 metric tons of additional storage capacity. Prior to the acquisition, Longwei Petroleum had 120,000 metric tons of storage capacity, so the acquisition resulted in a significant increase in storage capacity. With China's economy continuing to grow, which also affects the country's demand for energy, the increased storage capacity provides Longwei Petroleum with the ability to continue to increase its revenues.
Michael Toups, Longwei Petroleum's Chief Financial Officer, last week stated:
"We were pleased to have closed on the Huajie asset purchase using our own cash resources without dilution to our shareholders, and we are now operational at the facility. We expect meaningful revenue contribution from Huajie beginning in the second half of fiscal 2013 as we ramp up our operations and sales efforts. Based on our experience during the Gujiao ramp-up phase in 2010, we are confident we can develop this new market quickly."
Last week, Longwei Petroleum also updated its guidance for its fiscal year ending June 30, 2013. The company indicated that it expects to grow its annual revenues to $646.3 million, an increase of almost 27 percent, and increase its annual net income to $77.6 million, an increase of slightly over 24 percent. The company stated that this growth in revenues and net income is being driven primarily by the commencement of operations at its Huajie facility, as well as organic growth.
The past months have been a challenging time for many Chinese companies. Many have had a difficult time in growing revenues and net income, or for that matter even maintaining previous levels of revenues and net income. Longwei Petroleum, having demonstrated the ability to increase its revenues 6 percent, and net income by 4.1 percent for its 2012 fiscal year over 2011, is worthy of investor attention.
The significant impact of the company's Huajie asset purchase to Longwei Petroleum's revenues and net income growth are also worthy of note. Most importantly, the company's revision upwards of its guidance for current year revenues to an increase of 26.6 percent and its guidance for net income to an increase of 24 percent, are also significant.
Other Chinese Companies that Should Grow as the Country's Economy Continues to Grow
One of my focuses here at Seeking Alpha has been on identifying Chinese companies that meet a few general criteria. These criteria include positive trends in the growth of revenue and income; low PEs; companies that are focused on internal Chinese demand rather than export; and companies with good growth prospects for the future.
Other Chinese companies that I believe are also positioned that meet those criteria, that I've discussed here at Seeking Alpha, listed alphabetically, include:
Asia Carbon Industries' (ACRB.PK), is also located in Shanxi Province, the same province as Longwei Petroleum. The company's 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. The company's revenues for the second quarter of this year were $13.195 million, which, on an annualized basis, is slightly more than the $49.12 million the company reported for all of 2011. The company's net income for the second quarter of this year was $1.87 million. Its PE is 1.31.
China Automotive Systems (CAAS). Through eight joint ventures in China, the company manufactures and sells power steering components and systems to China's automotive industry, and also exports to North America. The company is the largest power steering manufacturer in China's domestic market. For the second quarter of this year, the company's sales increased 2.8% to $80.4 million. For the second quarter of this year, China Automotive Systems' net income was $8.6 million, up from $7.2 million for the second quarter of 2011. Its PE is 7.17.
China Carbon Graphite (CHGI.OB) 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. Its revenues for the second quarter were $11.88 million, and its net income was $870,000. Its PE is 4.18.
China Green Agriculture Inc. (CGA) produces and distributes humic acid-based compound fertilizers, other varieties of compound fertilizers and agricultural products. All of its products are certified by the Chinese government as "Green Food Production Materials," as defined by the China Green Food Development Center. For the first six months of this year, its sales increased 21% to $217.5 million, net income increased 27.5% to $42 million and the company had earnings per share of $1.56, which beat company guidance. Most importantly, the company provided guidance indicating that it would continue to grow during the rest of this year. The company has forecast revenues of at least $238 million, net income of at least $46.2 million, and earnings per share of at least $1.68 for the full year of 2012. Its PE is 2.13.
China Recycling Energy (CREG) provides environmentally friendly waste-to-energy technologies to recycle industrial byproducts for steel mills, cement factories and coke plants in China. Byproducts include heat, steam, pressure, and exhaust to generate large amounts of lower-cost electricity and reduce the need for outside electrical sources. The company's net income in the second quarter was $1.2 million or $0.03 per share, a decrease from $3.7 million, or $0.07 per share, for the second quarter of 2011. Its PE is 3.08.
Xiniya Fashion Inc. (XNY) designs, manufactures and sells men's clothing and accessories. For the quarter ended June 30th, the company showed an increase in revenue of almost 25% to nearly $25 million. But despite the increase in revenue, net income for the quarter was almost $3.2 million, a 43% decrease compared to the second quarter of 2011, due to primarily increased selling and distribution costs. My conclusion is that the company has already started reining in these costs, and that the likely decrease in these costs will be reflected in the company's third and fourth quarter results, making the company a definite candidate to be considered for investment. Its PE is 1.7.
Another company that I believe is not currently a buy, but worth watching is SinoCoking Coal and Coke Chemical Industries Inc. (SCOK). I believe that the next two quarters will be critical for investors to be able to determine whether the company is able to obtain a viable solution to its coal supply needs and whether the company can return its gross margin and net income to prior levels. If there is progress in resolving these issues, the company could be a buying opportunity. The company's current PE is 2.68.
Investing in smaller-capitalization companies, as well as investing in companies in emerging markets, including China, 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 risks.
The companies mentioned above include smaller capitalization companies with operations based in China. All the companies mentioned trade in the U.S., are all U.S. reporting issuers, and therefore 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.PK.
Additional disclosure: I may initiate a long position in LPH in the next 72 hours.