Two Solid China Plays

12/02/2009 12:00 pm EST


Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, editor of the Silk Road Investor, says two well-known China region companies have posted strong results and should continue to perform well.

Chinese insurers are well positioned, especially because stock markets have done well, and premium growth has been solid.

China was the sixth largest life insurance market in the world in 2008 and was the largest in Asia except for Japan (including Australia). Chinese insurers wrote US$96 billion worth of premiums last year, giving China a 3.85% share of the global market.

China’s market share has been on an upward trend over the past decade, driven by economic development and steady increases in average household income China is now 50th in the world in terms of life insurance premiums per capita.

The sector still offers great long-term upside potential because penetration remains very low at around 2.2%, the fourth lowest in Asia. Companies have also started focusing on rural areas that are rapidly becoming the next frontier for Chinese growth.

China Life Insurance Company (NYSE: LFC) remains my favorite way to gain exposure to the sector.

The company is China’s largest life insurer in premiums and geographic business reach. It has a policy base of more than 250 million people and controls 40.3% of the market; the top three players in the industry control 63% of the market.

For the first three quarters of 2009, China Life reported a net profit of US$2.9 billion, a year-over-year increase of 65%. Investment income, which increased 40% year over year, spruced up results, while operating expenses declined by 4%.

China Life is on track to deliver another strong year and will remain the premier insurance company in the country. China Life Insurance Company is a buy up to $80. (It closed above $76 Tuesday—Editor.)

Taiwan Semiconductor (NYSE: TSM) also reported solid quarterly numbers. Revenue was up 21% sequentially, while utilization increased to 96% overall and 100% for some production lines.

The company reported its greatest strength in computing, which was up 29% quarter over quarter. Communications was up 25%, while the consumer unit reported growth of 11%.

Management noted that fourth-quarter results may slightly exceed market expectations of flat or slightly negative growth. PC sales are expected to lead the way. The company also raised its full-year capital expenditure estimate from US$2.3 billion to US$2.7 billion. Management expects to increase spending next year to support growth.

Taiwan Semiconductor remains the ultimate company to own in the sector because it combines growth with defensiveness. It offers good cash flow returns due to its pricing and scale advantages, and management invested proactively to sustain the company’s lead in its strategic sectors. Buy Taiwan Semiconductor up to $15. (It closed above $10.50 Tuesday—Editor.)

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