The China Syndrome
02/18/2005 12:00 am EST
When it comes to US investors seeking opportunity in China, there is no better guide than Don Straszheim. The former chief economist for Merrill Lynch now operates a boutique research firm focused on the region. Here, he discusses some favorite opportunities.
"We believe the fastest growing industry in China over the next decade will be environmental protection and improvement (EP). According to the World Bank and the Chinese government, the EP industry in China is expected to grow by around 17.5% annually. China has no other choice but to address this problem--and they know it. Seven of the ten worst-polluted cities in the world, and 16 of the worst 20, are in China. Solid waste landfill from China’s explosive growth is overwhelming. Recycling in China just does not yet exist. There must be 10,000 ‘Love Canals’ in China, which are absolutely toxic bodies of water. Recycling is still just an idea.
"There are few new fix-the-environment companies in China yet. Just wait. We expect China to look to acquire environmental technology from abroad. Meanwhile, two major global firms are involved in EP in various ways: Halliburton (HAL NYSE) and Asea Brown Boveri (ABB NYSE). Four other companies are well positioned for the water-pollution market: ITT Industries (ITT NYSE), Danaher (DHR NYSE), Veolia Environment (VE NYSE), and Suez SA (SZE NYSE).
"In addition to the EP sector, here are some additional ideas to invest in China through major US-listed corporations.Las Vegas Sands (LVS NYSE) is a casino operator and developer that has one of the three licenses in Macau. The company did an IPO in December 2004 at $29 per share, and has since traded as high as $54. We are very much believers in the company's expertise and capability, and in the Macau gambling, resort, entertainment and convention concept in Asia. Their new Sands casino in Macau opened in July 2004 and is doing spectacularly, with plans for seven more in Macau. Their Las Vegas operations are also doing well. We are cautious short-term on LVS, on valuation grounds, but we believe long-term investors can consistently accumulate the stock over time.
"The9.com (NCTY NASDAQ) is the second-largest online gaming operator in China, behind Shanda Interactive. The company did an IPO in December 2004 and is well positioned in a great growth market. The online gaming market is expected to double again in 2005, as it has the last three years. They do a lot in the MMORPG market, which is 'massively multiplayer online role playing games.' The stock's market cap is just $430 million, pays no dividends, and has a p/e of 82 over the trailing 12 months. Although down from a high of $25 after the IPO, the stock is pricey, but we see this as one to accumulate over time.
"Anheuser Busch (BUD NYSE) is the world’s largest brewer and is aggressively seeking a big share of the Chinese market, which is now the world’s largest. The US and other developed markets are slow-growing and saturated. China’s market grew 8% last year, four times the US rate. BUD acquired Harbin Brewery, China’s fifth largest, in 2004, and its business ties with Tsingtao Beer in China are a positive. The stock is near its 18-month low, with a yield of 2%. This is a nice conservative grower with a Chinese kicker. Our price target is $62 by January 2007."
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