Hsu's View: China and Australia

02/10/2006 12:00 am EST


Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu is a new speaker at The Money Shows, having just launched his China Profits newsletter. Here, he looks at some favorite Chinese stocks, as well as a pair of Australian stocks that are poised to benefit from China's growth.

"There are only two state-owned enterprises (SOE) worth investing in, and we're going to talk about both of them now. SOEs are only worthy of our money when they are respectably run and have a monopoly (or close to it) in a growing sector. That describes China Mobile (CHL NYSE) in a nutshell.

"China currently has 400 million wireless handset users, and over 70% of them pay monthly fees to China Mobile. In addition, the market is growing more than 15% a year, and as bandwidth and those value-added services improve, China Mobile stands to increase its fees and revenues. Buy CHL under $25 for at least 20% gains by the end of 2006.

"China National Offshore Oil Corporation (CEO NYSE), known as CNOOC, is China's largest offshore oil producer and the only other SOE I recommend. The company has a monopoly on offshore drilling, exploration, and production in China, putting it at the epicenter of China's growing demand for energy.

"CNOOC also has higher standards of corporate governance than other SOEs, giving us as investors better protection and more information with which to evaluate company performance. Buy CEO below $75 with a target of $95 this year.

"Meanwhile, China's insatiable demand for natural resources and commodities has fueled a worldwide boom in commodities. And when supply is short, you want to invest in the companies that control the supply. In this case, that's mining companies. BHP Billiton (BHP NYSE) is the world's biggest, producing iron ore, coal, manganese, crude oil, manganese, copper, aluminum, tin, lead, stainless steel, and diamonds.

"The company will report earnings again on February 15, but last quarter, earnings were up an impressive 159% over the year before. I expect earnings to continue to grow, driven by the red-hot demand in China. BHP has a giant market cap of $111 billion and sells at almost 18 times earnings, slightly more than the S&P 500 average. I want you to buy BHP under $35 for expected six-month gains of 30%.

"Rio Tinto (RTP NYSE) is the second-largest diversified mining company in the world and a leading producer of copper, iron ore, coal, aluminum, and diamonds. With a $63 billion market cap, it is one of the major beneficiaries from exploding demand for natural resources. The company derives 80% of its earnings from the three commodities that China needs most: copper, iron ore, and coal.

"RTP is trading at 20 times earnings, which is cheap for a company with strong earnings growth. The stock has done well recently, but I see much more upside potential as the China Miracle builds momentum. Buy RTP on a pullback under $190. I'm targeting 30% returns over the next six months."

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