2 Asia Picks for a ‘Soft Landing’

06/15/2011 12:30 pm EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

If you're looking for good long-term growth in Asia, but prefer good ol' US accounting standards, these two picks are for you, says Yiannis Mostrous of Global Investment Strategist.

Don’t listen to the doomsayers. The global economy will achieve a “soft landing,” and emerging markets—led by Asia—will rally in the back half of the year.

This should lead to strong second-half performance for a laundry list of sectors, including consumer cyclicals, industrials, metals, and energy.

China Petroleum and Chemical (SNP), better known as Sinopec, is one of China’s state-run oil majors, and Asia’s largest refiner by capacity.

The company also has an exploration and production (E&P) business in China, and owns refineries that produce petrochemical products, such as gasoline, diesel, jet fuel, kerosene, ethylene, synthetic fibers, rubber, and chemical fertilizers. It also trades petrochemical products.

The firm derives 80% of its revenue from producing and distributing fuels, but is eyeing E&P opportunities in order to diversify from its main refining business. Sinopec has agreed to purchase a $2.5 billion share in an Angolan oil field from its parent company, China Petrochemical.

Sinopec does operate with a millstone around its neck: government price caps for fuels. But Sinopec is a direct play on China’s expanding economic growth.

In order to keep its economic engine humming, China is scouring the earth for natural resources, particularly oil. China is the second-largest consumer of oil behind the US, and has been importing record amounts of crude to meet runaway domestic demand.

For one, China is now the world’s largest market for automobiles—all of which will require more refined oil products.

Sinopec’s third-quarter net profit rose 15% from the previous year, to $2.94 billion, due to strong demand for oil products. In the January to September period, Sinopec processed 153.76 million metric tons of crude oil, up 14% from the 134.4 million tons processed the year earlier.

The company was also boosted by rising oil-selling prices. The average selling price of its oil surged by 52% to 3,411 yuan ($526) per ton in the January through September period.

And Sinopec will be the major beneficiary of future raises in oil-price caps by the central government. The government is expected to keep raising oil prices in response to global crude-price movements.

Although Sinopec doesn’t share the strong growth characteristics of China’s other oil majors, its shares still trade at an unwarranted discount to those of its peers, and offer better protection during a market reversal. Sinopec’s 2.2% dividend yield also provides investors with one more reason to hold the stock during turbulent times.

Reddy, Set, Go
India is a unique and vibrant economic growth story that has avoided the boom-and-bust cycles so prevalent in the region’s developing economies. You simply can’t build a solid long-term emerging-market portfolio without exposure to this economy.

Dr. Reddy’s Laboratories (RDY) is India’s second-largest pharmaceutical company in terms of sales. The Hyderabad-based firm boasts a broad range of generic and proprietary drugs, as well as active pharmaceutical ingredients. The firm has a low-cost manufacturing base in India, and is increasing its global footprint in key developed and developing markets.

The company represents a play on the fast-growing pharmaceutical industry in emerging markets. It has strong research and development capabilities in the areas of cancer, diabetes, cardiovascular, and bacterial infections.

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