Building on China’s Stimulus

12/18/2008 11:12 am EST


Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says China’s leading aluminum company should benefit from infrastructure spending in China’s stimulus package.

China isn't completely insulated from the global economic slowdown, and will likely feel some effects from it in 2009. Also, considering that China's economic growth has surpassed the unsustainable level of 10% a year for nearly five years, it shouldn't be surprising to you that the Chinese economy would slow its growth rate in 2009 and possibly 2010.

But the Chinese government is taking bold steps to stimulate economic growth within China's borders and keep the country moving forward. The $586-billion stimulus package is one way that China is spurring on growth within the country, and I'm expecting similar measures to be taken next year as Chinese policy makers focus on keeping China's economy strong despite the global economic slowdown.

And I think that China's huge surplus and reserves—nearly $2 trillion—will allow it to spend its way out of a severe economic slowdown. The country's combination of domestic spending and government-driven domestic investments should allow the Chinese economy to hold its own against a global recession, and in turn create profitable investment opportunities.

One of our former China Strategy recommendations will benefit greatly from an increase in infrastructure spending. So, in this month's issue, I'd like to re-recommend China Aluminum (NYSE: ACH).

Based in China—the fastest-growing aluminum market in the world—ACH has grown to be the largest producer of alumina and primary aluminum in China. And it is the third-largest producer of alumina and fourth-largest producer of primary aluminum in the world. As a state-owned enterprise that enjoys a government-granted monopoly, ACH has benefited nicely from the increasing aluminum consumption in the construction, transportation, electricity, and packaging industries in China.

In all, China currently consumes one-third of the world's aluminum and alumina, and ACH is at the forefront of supplies. I expect China's demand to increase even more, due to the economic-stimulus package. With more capital invested in infrastructure, the need for alumina and aluminum will likely rise, and I look for ACH to be a top beneficiary.

The company is also growing aggressively through expansion and overseas acquisitions. Because of its domestic and global business, China Aluminum's total revenues increased 17% year over year to 76.2 billion yuan ($11.1 billion). But despite posting solid growth, the stock has plunged this year during the commodity sell-off and correction in Chinese stocks. Now, this just means that we can now invest in ACH's strong fundamentals at a steep discount.

With China's new stimulus plan, the country's aluminum demand is expected to grow a robust 15% this year, compared with 6% growth worldwide. And I project China Aluminum's production growth to clock in at 20% this year. 

ACH is cheap right now, trading at only 13x [estimated 2008] earnings. I recommend that you take advantage of this great buying opportunity. Buy ACH under $12. (It closed below $16 Wednesday—Editor.) I'm targeting $20 in the next six to 12 months.

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