Building a Richer China

07/21/2010 12:01 am EST


Yiannis Mostrous

Editor, The Capitalist Times

China Construction Bank and mall developer Renhe deserve to be picked up while on sale, writes Yiannis G. Mostrous in The Silk Road Investor.

Asian markets have been a difficult place to operate over the past ten months. They’ve traded in a wide band of around 20%, punctuated by sharp turns of up to 8% in either direction. Amid this volatility, those portfolios that have outperformed have done so because they are properly hedged and are overweight structural Asian investment themes, namely domestic demand and urbanization.

Asian markets are now clearly discounting a slowdown in the economic cycle. But if I’m right on my long-term view that the global economy won’t suffer a “double-dip” recession, the next couple of months will likely provide several opportunities to add to your holdings in the region.

China has been the big disappointment of the first half of the year. But given the resilience its economy has demonstrated in the past, it’s reasonable to anticipate it will be a big beneficiary once investors begin to deploy funds in the region.

Although China Life Insurance (NYSE: LFC, Hong Kong: 2628) remains my favorite stock to own in China, the Chinese banks are now my No. 2 domestic sector. Results have come in weaker than expected, and the bank stocks are now trading at more attractive valuations.

China Construction Bank (Hong Kong: 0939), one of the four largest banks in China, is the best one to own. The stock has been hit by fears about restrictions on residential lending. These fears are overblown. This is an opportunity to buy a growth sector at reasonable valuations. China Construction Bank is a buy up to HKD8.

Real estate may surprise on the upside in the second half of the year. Renhe Commercial Holdings (Hong Kong: 1387, OTC: RNHEF) is my favorite real estate company in China. Renhe develops underground shopping malls in prime commercial areas of key Chinese cities. The company isn’t exposed to the housing market in China, so it hasn’t been affected by the tightening measures that the government has undertaken.

This is a niche segment of the real estate market in China, and Renhe is quickly becoming a dominant player. The company enjoys high net profit margins (62%), and the local shares feature a dividend yield of 6.4%.

Buy Renhe Commercial Holdings up to HKD3 in Hong-Kong and up to $0.25 on the US over-the-counter market—though I prefer local shares in all cases.

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