Two Good Bets on Greater China

05/02/2007 12:00 am EST

Focus:

Jim Trippon

Editor-in-Chief, China Stock Digest

Jim Trippon, editor-in-chief of China Stock Digest, says a Chinese national oil company and a Taiwanese telecom provider offer good growth prospects at reasonable prices.

Despite pressure on its bottom line from relatively weak international oil prices, China’s National Offshore Oil Company, CNOOC (NYSE: CEO), continues to rise, producing a 3.5% gain in share prices for the past month.

CNOOC is continuing its relentless expansion drive, increasing production and raising its reserves of oil and gas through ongoing drilling, exploration, and acquisitions. Earlier this month CNOOC announced it would build a liquid natural gas (LNG) plant in Zhuhai, a special economic area bordering Macau. The company says it plans to boost its imports of liquefied natural gas to “60 million tonnes a year in the coming 15 years.” Increased imports of clean-burning LNG would help reduce reliance on dirty coal-based energy and meet growing energy demand in coastal regions like Macau.

In another unexpected development, the company also announced that a biodiesel plant with an annual output of 60,000 tons will be built within the year in Dongfang City, Hainan Province.

The company is still trading at approximately nine times forward earnings, keeping CNOOC at an attractively low valuation compared to its competitors in the oil patch. We believe the company remains an attractive “buy” due to its ongoing growth drive and expanding access to the hungry Chinese natural gas market. The company’s trailing 12-month dividend yield is 3.24%. CNOOC is soon expected to gain approval to sell A-shares on the Shanghai exchange. (It closed at $86.25 in New York Tuesday—Editor.)

Chunghwa Telecom ADSs (NYSE: CHT) remained largely flat despite market volatility in Mainland China. Although total revenues are not increasing by leaps and bounds, the company has demonstrated its success in maintaining its cash flow despite consumer migration from its core fixed-line business.

Chunghwa has decided to invest $4 billion over the next five years to upgrade its fixed-line and mobile networks. The company has set a target of acquiring 580,000 multimedia on-demand (MOD) subscribers by the end of 2007.

Taiwan’s top telecom operator has also made a major investment to strengthen its online video services.

Chunghwa Telecom obtained a 21% stake, or 2.59 million shares, in Elta Technology Co Ltd. Elta delivers digital content, including sports events such as Major League Baseball games, to Chunghwa Telecom’s mobile users and Internet TV subscribers, as well as other mobile carriers.

The company says its latest investment is part of Chunghwa Telecom’s strategy to integrate its video business and provide richer video services. Chunghwa is also planning an alliance with mainland Chinese wireless companies to partner in the development of advanced Chinese language 3G wireless services.

Chunghwa Telecom remains Taiwan’s most profitable telecom carrier. Dividends continue to be excellent with a trailing twelve-month dividend rate of 6.4%. It enjoys a forward P/E ratio of approximately 14x, an attractive figure for a diversifying telecom company, and it remains a buy in our books. (The ADSs closed just above  $20 Tuesday—Editor.)

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