Atticvs Research's  Instablog

China’s 4 trillion yuan, $586 billion, stimulus program is having a stronger and more immediate effect on its economy than had been anticipated by most commentators, particularly for companies within the infrastructure sector.

Q1’09 represented a terrible time for Chinese steel companies with heavy losses reported. And the start of Q2 saw steel prices trending still lower before commencing a recovery in May that has since gained momentum without pause. As a consequence of firming prices China Iron & Steel Association (CISA) reported in June that its 72 largest members recorded combined profits in May of 1.262 billion yuan, $185 million, after a 7-month losing streak. After better prices in June, CISA members posted combined profits for the month of 3.55 billion yuan, $520 million - almost triple the May profits. This morning, August 4^th, CISA estimated that its members made total profits of 20 billion yuan, $2.9 billion, during the month of July as steel prices accelerated yet again during the month, making July the most profitable single month in 8 years. By the end of July rebar and wire rod prices were 25% higher than those of mid-April with cold-rolled products showing 29% gains. Already in the first few days of August prices have edged up even further and September price hikes were announced last weekend (August 1, 2) by the largest players. All indications at this point are that August and September will also be very profitable months for Chinese steel companies and a good recovery in terms of volumes, pricing and profitability is underway.

The remainder of this note looks at the impact of the recovery on three Chinese steel companies quoted on US exchanges: China Precision Steel Inc (Nasdaq: CPSL), Suter Technology Group Inc (Nasdaq: SUTR) and General Steel Holdings Inc (NYSE: GSI). All three should meet or beat brokers’ estimates for the three months ending June 2009. The real story however is about Gross Margin expansion in the July-September quarter and thereafter. Investors should expect big improvements in forward guidance.

Whilst the macro-economic picture for China remains unerringly bright the Beijing Government is increasingly aware of the critical importance of preserving national stability in the face of a growing wealth disparity, and unrest, between the rich eastern seaboard and the poorer hinterland. With this in mind Beijing set about developing the western region as a top priority within the country’s Plan for Economic Development - dubbed the “Go-West” strategy. The Go West strategy will be of long-term benefit to the entire western region and is proving particularly beneficial to Xi’an city and its surrounds. Xi’an (pop 8 million), situated 600km south west of Beijing, is capital of Shaanxi province (pop 37 million) and is the gateway city to China’s vast hinterland. As such Xi’an and Shaanxi are pivotal to the Government’s Go West strategy. This note concentrates on two infrastructure plays that generate most of their sales in the Xi’an/Shaanxi vicinity - General Steel Holdings Inc (NYSE: GSI) and China Housing & Land Development Inc (Nasdaq: CHLN). Both are ideally positioned to benefit from China’s enormous infrastructure build-out plans. The remainder of the note deals with China North East Petroleum (AMEX: NEP), a low-cost well run, highly efficient oil driller located north east of Beijing. All three companies have excellent long-term potential and, following the current sharp pre-Q2 earnings season sell-off, offer compelling value and an opportunity to participate in the China growth story at unusually good entry prices.