Murphy's China Megashift
02/10/2006 12:00 am EST
In his New World Investor newsletter, Michael Murphy maintains several portfolios, each focused on stocks within a particular high growth sector. One of his portfolios is called the "China MegaShift". Here, he looks at some favorites ideas to play the growth in China.
"China has been reporting economic growth around 9.5% a year, which is certainly a breathtaking number for a huge economy. But the overall number is the average of a slow-growing rural economy, maybe 2% or 3% a year, and a very fast-growing urban economy, growing around 17% a year. Now it turns out that China’s overall economic growth was even better than we thought, and the extra growth is in the urban consumer and services sector that we are investing in.
"Remember that China has no interest in faking big numbers because of the international criticism of the advantages the cheap yuan gives them in growing their economy. This revision means that their GDP was 16.8% larger than previously estimated, and moved China ahead of Italy to become the sixth-largest economy in the world. (France is fifth and will also be surpassed by China this year.)
"Of course, it also means that China’s growth rates were moving even faster than we all thought, and the market for digital consumer technology, Internet access, online gaming, and travel are bigger and better than even I’d thought. This is mighty good news for 2006 and our stocks in our ‘China MegaShift’ portfolio. The potential negatives I am watching for 2006 are the impact of a US slowdown on China’s urban economy and whether that translates to Wall Street pressure on our stocks.
"With the wild success of Hong Kong Disney World, I think Ctrip (CTRP NASDAQ) is a very strong buy at current levels for 2006, all the way up to my $66 buy limit. The company is the leader in online travel planning and ticketing. This is a business that will grow rapidly for several years. China's newly prosperous folks want to travel, especially as they get credit and debit cards.
"I also like the broader-based portals— Sina (SINA ASDAQ), Sohu (SOHU NASDAQ), and TOM Online (TOMO NASDAQ). SINA operates Chinese-language sites globally, targeting people of Chinese descent with portals of branded content, entertainment, news, community, and e-commerce. They have local portal teams in Mainland China, Hong Kong, Taiwan, and North America. I want you to buy SINA under $28 for a $44 target in 2006 and a double in two years.
"SOHU is the largest search-based portal. Their latest search engine, Sogou.com, tripled monthly traffic in less than six months. Sohu also will provide the website for the 2008 Beijing Olympics, which will be a major advertising sales opportunity. I want you to buy SOHU on dips under $18, looking for $27 in 2006 and a double in 2007. TOMO runs the 5th largest portal in China, which is used to feed their main business, wireless value-added services. It is the leading wireless Internet provider to China’s 378 million cell phone users— the biggest cell phone market in the world. Buy TOMO aggressively on dips under $18 for an easy double to $36 in2006, and a triple in 2007.
"Meanwhile, any slowdown in Chinese growth would just give Huaneng Power (HNP NYSE) a chance to catch their generating capacity up to demand. Huaneng is the largest independent power producer in China and will benefit from the increased power demands of a growing Chinese middle class. I also expect to see much more discussion in the US of the ‘green nuke’ pebble-bed reactor option in 2006, which will focus attention on HNP’s 50%-owned Chinergy pebble bed plant facility that is starting construction. They should profit tremendously from being first-to-market with this technology, and probably also will wind up sharing the technology for export. Buy HNP under $30."