Buying China Profit Without the China Risk

02/08/2008 12:00 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

Jim Jubak, senior markets editor, MSN Money, gave investors his take on the current opportunities and risks in China…

Columnist Jim Jubak noted that many of the risks in China are the same as those in other investment markets, but are just exaggerated because of the tremendous growth that China has been experiencing.

China can grow 8% to 9% per year without the risk of unreasonable inflation, but it’s currently expanding at 11%. The Hong Kong stock exchange was up 40% to 45% from June to October 2007, then saw a huge decline of around 25% from the end of October through the first week of February 2008.

Although Chinese companies can have nebulous accounting standards that don’t often correlate with the standards used in the US. Jubak is more concerned with the effect policy decisions made in Beijing may have on Chinese companies and their stocks.

He noted that there are certain strategic sections the Chinese government won’t give up, including airlines, banking, telecommunications, life insurance, technology, steel, and aluminum–a very large part of the economy and market.

Jubak cited Ping An Insurance, a company whose hands were slapped when it attempted to go back to the market for a secondary offering, and the difficulty of establishing valuations in the potential, but ultimately derailed, sale of a portion of China Eastern Airlines to Singapore Air.

Jubak said investors can reduce their risk by not buying Chinese stocks at all but instead taking advantage of the region’s growth by purchasing developed-world stocks of companies that are playing in the Chinese market, outside these strategic sectors.

Examples include:

  • Luxottica (Nyse: LUX), an Italian sunglasses maker, which has been busy gobbling up smaller sunglass companies in China
  • Joy Global (Nasdaq: JOYG), a manufacturer of mining equipment, and one of only three remaining from more than a couple dozen in existence 25 years ago
  • HSBC (Nyse: HBC), a bank that recently wrote off some $20 billion in the subprime business it bought a few years ago, but which has now returned to its Asian roots, scooping up Chinese and Taiwanese banks, and is currently selling on the cheap
  • Everlight Electronics (Taiwan: 2393), a Taiwanese company that makes light-emitting diodes (LEDs), which are used in the new energy-efficient bulbs

Alternatively, investors can buy “platform” stocks, that don’t trade in China because their roots are somewhere else, but for all intents and purposes might as well be in China. He cited the iShares MSCI Singapore ETF (Nyse: EWS), which has about 50% of its holdings in the financial segment and the rest in Singapore multinationals like air and telecom.

Lastly, Jubak suggested that investors might consider buying Chinese stocks outside the strategic sectors, such as Suntech Power (Nyse: STP), the fourth largest producer of solar cells in the world, which is helping to drive up the efficiency of cell production; and Citic Bank (HK: 0998), which has great potential for expansion since it has just 11% of its loan portfolio in personal loans, one-half of the industry average.

That being said, Jubak told attendees that while these companies do offer potential, he’s not certain that he would buy anything in China right now.

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