3 Solid Income Picks from China

10/23/2012 11:30 am EST

Focus: GLOBAL

Neil George

Editor-in-Chief, Income Publication and Products, Agora Financial

Too many investors are getting spoon-fed a lot of misconceptions about what's going on in China, and they're missing out on some solid growth and income opportunities, says Neil George of By George.

Gregg Early: Neil, what's going on with China? There seems to be a lot of talk in the US that China is slowing down and things are looking grim. But then again, there is some other news out that inflation is only 1.9%...and with a 7% plus growth rate, that's pretty good. You have some interesting perspectives on this.

Neil George: I think the key thing to think about is that China has been demonized by many in the US press, and certainly in the political segments. It's almost like many have been looking forward to China faltering or failing.

The reality is that China is ahead of the game, and it's starting to re-shift a lot of its efforts away from the United States and the larger markets in the European Union and directing more efforts toward developing markets beyond the US and the Europeans. And they've been having some success.

One of the ways that they have been doing this is not simply by having a bunch of salesmen out there calling on companies, but they're getting at the roots of the emerging markets by dealing with foreign direct investment (FDI).

The Chinese have the sovereign funds. They also have the government-sponsored efforts just like the US has with some of the foreign outreach. Therefore, if you look at foreign direct investment, it's been surging over the past decade coming out of China, up by about 34% to 35%. And much of that has been going into some of the markets beyond the US and EU.

The interesting thing about this is that as they've been doing this direct investment, they effectively have been getting more trade going to these countries. So if you look at the past year, for example, the US trade has been largely slack, only up about 3.3%, and the EU is down over 12.1%. But if you look at the newer markets where China has been refocusing their efforts, intra-Asia, it's up nearly 9%. FDI to Latin American markets is up over 12%, and to the African markets, it's up again nearly 12%.

China has been seeing rapid improvements in their export sector and they can now say to the US, "Well, you don't want us, that's not such a bad deal for us. Europe complains about us, not so bad. We have other markets." And it's starting to show up in their export mix.

Gregg Early: So they're basically taking the approach that rather than using developing nations as resource distribution centers, they're actually creating a virtuous circle as they develop those markets-those people will be buying more products from China.

Neil George: And the key thing is that as they have done this, they actually create a lot of goodwill. They also have a lot of local Chinese that are in this marketplace. They interact more with the local populace. And as a result, people are welcoming the Chinese goods, rather than being scared of it.

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We have seen the US, where Chinese companies like Huawei or BTE have been demonized. You have the situation where companies such as A123 Systems, a US battery manufacturer, was forbidden to be invested in by a major Chinese company, Wanxiang Group. As a result, we are always looking to bash China.

But you know in the other markets, they are very welcoming of Chinese investments and very welcoming of Chinese goods. Therefore, this is the next wave that's helping the Chinese economy perform well.

As you mentioned earlier in this discussion, growth rates are still running at about 7.4%. We are starting to see some discussions about rising exports, so people are starting to do their homework, like we are discussing today, and seeing that exports are moving up in other parts of the world beyond the US.

It's actually creating a great environment for a lot of quality Chinese companies that I think an individual investor needs to start taking a look at.

Gregg Early: Well, what stocks do you like in this sector?

Neil George: Well, I think capitalizing on both the continued expansion of outward investments and the idea of capitalizing on the new trade areas within Asia, Latin America, Africa, as well as serving the common needs of the local Chinese market. There are three companies to take a look at.

The first one is one of the major investors in a lot of these emerging markets in the energy segment, which is CNOOC (CEO), or the Chinese National Overseas Oil Company. It's China's primary petroleum development company, and the company basically has been seeing continued rapid rise in revenue of about 33% per year.

It also pays a fairly good dividend of about 3%, and again being paid in renminbi, which is doing quite well-just hit another new high again per dollar. The dividends are probably going to be very good and very positive for the average investor going forward, and therefore it's one of the ways to cash in on those outward investments.

The next company to take a look at is actually in the shipping business. Again, too many people are focusing on the ships that are going to and from the US or Europe, and they're having trouble. You focus on a shipping company that's dealing in intra-Asia shipping lanes, which that's where you are seeing that big growth in exports from China. One of the companies to look at would be a company called SeaSpan (SSW).

You are looking at revenue which has been surging up about 38%. Its actual rates on its ships have actually been climbing within the regional market it focuses on by some 25% in just the past few quarters alone. But things are good from a business standpoint, and it pays about a 6.2% dividend yield...again, with that rising renminbi and Hong Kong dollar, you're going to get some additional benefit there as well.

 And last, if you look at the eternal meat-and-potato market of telecom, China Mobile (CHL), it's not the fancy companies like a Chinese Unicom or so forth that are dealing with the iPhones and i-products to the upper echelon. It's the phone company that provides the middle class and the lower classes with their basic services.

Gregg, I use their services whenever I'm in China. It's the company that always works well, for data as well as for your phone.

It pays a dividend of about 4%. Again, with the rising renminbi, it's going to mean that that's going to help that dividend flow as well. Revenue is consistently climbing at a very steady rate of about 8% for a very meat-and-potato marketplace, and again I think these three companies represent what I think is an ongoing development.

Outward investment, developing of the resources, focusing on shipping where things are actually being bought and consumed readily, and being welcomed by local markets rather than being pushed away as we see in the US, and lastly, focusing onto the middle and lower end of the Chinese marketplace, that is the meat and potato of the China market.

Again, CNOOC, China Mobile, and SeaSpan would be three that I would want to take a peek at.

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