Two Ways to Play Asia's Growth

07/22/2009 11:00 am EST

Focus: STOCKS

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, associate editor of Personal Finance and editor of Silk Road Investor, says Asia is a long-term growth story, and he thinks two stocks will profit.

Asia is a long-term story. It’s a huge region that’s urbanizing itself, leading to positive domestic demand trends, growth in construction and infrastructure, and steady income increases.

As the global economy went into recession and Asian exports weakened, domestic demand softened. But the infrastructure spending that’s under way in Asia has helped domestic economies hold up better.

Private consumption was the biggest contributor to China’s GDP in 2008. Domestic demand represents 36% of China’s GDP, which is quite small compared to India and the US. But China is working to improve its domestic demand economy, and rapid growth will follow.

India also has been doing its part to boost consumption. Rising household income, a rarity in this difficult environment, boosted domestic demand and enabled India’s economy to perform far better than many investors and analysts expected. The recent growth in car sales shows that consumer sentiment in India is improving.

Haier Electronics Group, China’s biggest home appliances maker, estimates that only 19.6% of Indian households have refrigerators, 27% own television sets, and just 3% of homes have air conditioners. That means a lot of potential durable goods orders.

HDFC Bank (NYSE: HDB) is the second largest private-sector bank in India, with a strong position in corporate banking and treasury and retail banking segments. HDFC Ltd., the oldest mortgage finance company in India, owns 22% of the bank. The bank’s loan book is 60% retail, 40% corporate.

Because of the economic slowdown, delinquencies are up, particularly in its unsecured retail loan portfolio. This development was expected, and credit-related costs (2% of loans) will stay elevated for the next couple of years.

HDFC Bank’s retail loans were traditionally concentrated outside the mortgage space. But it has started buying mortgages from HDFC Ltd., with the expectation that home loans will account for about 16% of its retail book in 2009.

The bank is poised to achieve 20% earnings growth. One of the best run banks in India, it offers exposure to the country’s long-term growth story. Buy HDFC Bank up to $105, especially during weakness. (The ADRs closed above $101 Tuesday—Editor.)

PT Telekomunikasi Indonesia (NYSE: TLK) offers steady growth in a promising market and should be the key beneficiary of mobile growth in Indonesia. Because of its strong cash position and extended network, its mobile unit Telkomsel will be able to expand its dominance outside Java, where it already enjoys 70% market share.

Mobile penetration remains low in the hinterlands at 25% to 30%, whereas mobile penetration nationwide currently stands at around 40%. PT Telekom offers a superior network and tariffs similar to those of its competitors. The company has a share buyback in place of around 2% to 3% and offers a 7% yield. Buy PT Telekomunikasi Indonesia up to $32. (The ADRs closed above $34 Tuesday—Editor.)

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