Two Bets from the East

08/20/2007 12:00 am EST

Focus:

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, travels along the Silk Road to find two entrees profiting from China’s hot growth mode…

CNOOC (NYSE: CEO) signed a new production-sharing contract with Singapore Petroleum Co. for a particular section in the South China Sea. According to the agreement, Singapore Petroleum will gather seismic data, drill prospecting wells, and bear all costs associated with prospecting, while CNOOC gains a right to own 51% rights and interests to most of all oil and gas reserves found in the section—a pretty sweet deal if you ask me.

CNOOC also signed liquefied natural gas (LNG) sales contracts with five cities in Fujian, located in southeast China, where operation of its second LNG import terminal is set to commence in 2009. Last year, CNOOC had signed a deal to source LNG from BP's Tangguh field in Indonesia to its terminal in Fujian. The recent contract stipulates that the company provides Fuzhou, Putian, Quanzhou, Xiamen, and Zhangzhou with 2.6 million tons of LNG each year for 25 years. Additionally, the company will supply fuel for the province's three gas-fired power plants.

Investment banks JP Morgan and Credit Suisse upgraded their rating on CNOOC to "buy." Credit Suisse predicted that, compared to its rivals, CNOOC will trade at a premium. I believe that the company will be able to offset the pressures of higher production costs with jumps in sales revenue thanks to new contracts and by maintaining superior profit margins. Buy CEO under $121.

Morgan Stanley China A-share Fund (NYSE: CAF): a couple of weeks ago, China's CSI 300 jumped 6.8%—extending a three-week 16% rally—on the belief that corporate earnings growth is sustainable. The index has more than doubled year-to-date, regaining its lead as the best performer this year among 89 indexes tracked by Bloomberg.

Our own Morgan Stanley A-share Fund gained almost 10% that week while the S&P 500 fell 1.8%. Its top-performing holdings were Shanxi Xishan Coal and Electricity Power Co. and Hudong Heavy Machinery Co. All three were up over 18%, and Wuhan Iron & Steel Co. was up 16%. These companies are moving up so fast because of last-minute efforts to finish construction for the 2008 Beijing Olympics, which increase the already-strong demand for coal, electricity, machinery, and iron. Remember, we are unable to invest directly in any of the companies I've just mentioned. We own this Morgan Stanley fund to capture the profits happening in the A-share market. Buy CAF under $45.

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