Shopping the Chinese Underground

01/19/2010 9:18 am EST


Yiannis Mostrous

Editor, The Capitalist Times

Subterranean mall developer Renhe and Hong Kong conglomerate Hutchison Whampoa boast solid yields in addition to the seasonal momentum, writes Yiannis G. Mostrous in the Silk Road Investor.

December to February has [historically] been the most profitable time for Asian equities. During this period of traditional strength, investors usually perform the best by going with the flow rather than relying on rigorous fundamental analysis. True, buying stocks based on value analysis has been a rewarding strategy over the long term, but it takes more than three months for a company’s fundamentals to affect its stock price measurably.

Nevertheless, investors looking for a quality Asian company to buy at an undemanding valuation should consider Hong-Kong based conglomerate Hutchison Whampoa (Hong Kong: 00013, OTC: HUWHY), which also offers a 3.5% dividend yield.

Renhe Commercial Holdings (Hong Kong: 1387, OTC: RNHEF) develops underground shopping malls in prime commercial areas of key Chinese cities.

The spaces used are actually civilian defense shelters for times of war; there are no land-use rights associated with these malls, and the company avoids paying large, up-front land premiums. Revenue is generated through the lease or sale of 40-year operating rights. This is a niche segment of the real estate market in China, and Renhe is quickly becoming a dominant player.

Because of the low capital required and the niche nature of the business, the company has achieved solid profitability and growth. Renhe has also amassed a net cash position, which makes its shares even more attractive—and with the stock trading at eight times earnings, valuations aren’t too demanding. The company enjoys high net profit margins (62%), and the local shares feature a dividend yield of 4.94%

The stock debuted in Hong Kong in October 2008 at HKD1.3. [Shares closed at HKD 2.01 in Hong Kong Tuesday—Editor.] Buy Renhe Commercial Holdings up to HKD4 in Hong-Kong and $1.50 in the OTC market. As always, it is preferable to buy the local shares, as liquidity is ample and execution easier.

CNOOC (NYSE: CEO) is the third-largest oil and gas company in China, accounting for 8% of the nation’s aggregate reserves. But its real value lies in its exclusive rights to offshore exploration, development, and production of crude oil and natural gas in Chinese waters.

To ensure its continued growth, CNOOC Group, the company’s parent, began construction on several energy projects in conjunction with China’s southeastern Fujian province. Building a crude reserve, liquefied natural gas station and a few pipe networks will curb the region’s reliance on imports.

In Venezuela, CNOOC will develop the Boyaca reserve, boosting ties between Venezuela and China. The reserve will pump out one million barrels per day, up from 400 barrels per day. This should boost oil sales to China.

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