Caution—and Some Good Buys—in China

06/05/2007 12:00 am EST

Focus:

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor of China Stock Digest, urges investors to tread carefully in China’s treacherous market but says there are less risky ways to invest in its growth.

The skyrocketing price increases on the Shanghai Exchange dictate increased caution for investors on this side of the globe, even though there is a substantial difference between A-shares traded only in Shanghai and the much more conservative ADRs [in which wespecialize].

As I said on May 23, the time has come to begin taking profits in our China portfolio. (The Shanghai Composite index has sold off dramatically in the past week—Editor.) We recommended selling two holdings immediately. They are: Taiwan Semiconductor (NYSE: TSM) and Nam Tai Electronics (NYSE: NTE). We have profits and a nice dividend in both of these stocks. However their earnings have been weak this year.

[Here are some] stocks that are still in the “Buy” column:

Huaneng Power International (NYSE: HNP) has delivered powerful gains totaling more than 20% over the past three months in the wake of strong earnings reports. Earlier Huaneng, China’s largest electricity generator, announced a net profit increase of 16.5% during the company’s fiscal year 2006.

The company is making good on its promise to continue its ambitious expansion drive. Huaneng says it now has government approval to invest $575 million to build two 600-megawatt coal-fired generating units in Shandong province. The company recently started construction on a $313-million power plant in Jiangxi Province in the country’s industrialized east. Huaneng will also build two “supercritical” coal-fired generators of 350 megawatts each in Guangzhou city.

The company [also] will focus on environmentally friendly projects by increasing its renewable-energy production tenfold by the year 2020 with a goal of 4,500 megawatts of production. Huaneng continues to be a Buy because of increasing production and the continuing demand for energy in China. (Demand for electricity in China is expected to increase 12.5% from a year earlier.) With a [dividend yield] of 3.5%, an estimated P/E of 15x and an earnings growth rate of 6.6%, we’re expecting consistent returns in the coming year. (Huaneng’s ADRs closed at $41.64 Monday—Editor.)

Shares of PetroChina (NYSE: PTR), the nation’s top oil producer, surged strongly last month after the company announced China’s biggest discovery in half a century. PetroChina has discovered huge oil and natural-gas reserves in Bohai Bay, [which] has reserves of more than one billion tons, or 7.33 billion barrels of oil equivalent, with about 400 million tons of proven reserves. There is speculation that ongoing drilling may yield additional proven reserves of 3.3 billion barrels of oil. (Cnooc, China’s biggest offshore oil producer, has total reserves of 2.5 billion barrels of oil.)

PetroChina [also] has upped natural gas production 14% from a year ago. Even after the Bohai Bay discovery PetroChina remains a reasonably priced “buy” with a forward P/E of 12x and a healthy dividend yield of 3.5%--more than twice the industry average. (The ADRs closed at around $131 Monday—Editor.)

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