China: A "MegaShift"
12/02/2005 12:00 am EST
"China reported 9.4% GDP growth in the September quarter, and should report consumer prices up 1.5%. It looks like the government has decided not to try to slow growth further unless inflation accelerates, or loan growth starts getting out of hand, or the bottlenecks in power and transportation get much worse. The economy will grow 9.5% this year, and I’m now looking for another 9.5% both next year and in 2007. China will pass Italy to become the world’s sixth-largest economy this year, and then will pass both France and the UK next year to become the fourth-largest.
"Huaneng Power (HNP NHYSE) reported a 19% increase in revenues and an 8% increase in net income for the September quarter. Earnings per share rose 9%. They generated 37% more power, but increasing coal costs that have not yet been recovered in rate increases pinched profit margins. However, coal costs eased towards the end of the quarter, and this was the first increase in quarterly earnings this year.
"Management said China’s power demand may rise only 10% next year and 8% in 2007, while industry capacity is rising 15% in 2006 and 13% in 2007. That would mean lower utilization, and that comment caused the stock to sell off. But this company is run by the son of a former Prime Minister, and it is the official Chinese government line that growth will slow in response to their initiatives. I haven’t seen them have any success so far, and given the persistent brownouts/blackouts in various provinces, I doubt very much power demand could grow that slowly. So I see this recent stock price dip as an opportunity to build or add to your position. Buy under $30 for my $45 target.
"Taiwan Semiconductor (TSM NYSE) reported earnings before the opening this morning and pretty much knocked the ball out of the park. Shipments rose 19.8% from the June quarter, and the factories ran at 96% of capacity. It’s about to get better, too, as they forecast 100% utilization this quarter. In that environment, they can raise processing prices and let the increment fall right to the bottom line.
"For the quarter, they did 15 cents per ADR on $206 million, almost back to the September 2004 record quarter of $207 million. They forecast an all-time record in the current period, hitting $229 million to $235 million. Cell phones and game consoles are the hot items at the moment. It looks like this company finally will get the respect it deserves, and you should buy TSM up to $10 for a sharp move to $20 next year."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...