One of the key factors in estimating corporate profits for Chinese companies has been the price of the oil. As the chart below testifies the price of crude hit $66.64 by the end of May, a record for the month. It seems unlikely that oil will go back to under $45 in the near future and if that’s the case then we should pay attention to the following companies.
One of the most obvious is Petrochina (NYSE:PTR), Asia’s largest oil producer. The company is benefitting from high oil prices and the profit outlook is even better after Beijing dropped the windfall tax back at the end of 2008.
Another obvious benefactor is CNOOC Ltd (NYSE:CEO), China’s offshore oil producer.
Sinopec completes China’s oil triumvirate but as I said before Sinopec is adversely effected by high oil price and my advice is again, sell.
I suggested selling Shanghai Petrochemical (SHI) in the past Newsletter and I stress it again, if you haven’t done so. Both Sinopec (NYSE:SNP) and Sinopec Shanghai Petchem (NYSE:SHI) had a 60% plus rally since March 2009 as the chart below testifies, and with oil climbing higher, it’s time to cash in.
Looking at the airliners, high oil means high kerosene cost, the simple largest cost item for the companies. Both China Eastern Airlines (CEA) and China Southern Airline (ZNH) have been in the Conservative Portfolio for a long time and it is time to take profits off the table. ZNH was added to the Conservative Portfolio in November last year at $7.88 a share. It last traded at $15.10, making it a 91.6% return for the last seven months! China Eastern Airline (CEA) was added in February at $13.51 split adjusted price and is up 66.8% since then.
High oil price does a lot of good for way oversold Chinese solar companies. Based on previous estimates, solar starts to make sense when the crude is above $60 a barrel. With Chinese solar companies in a vastly oversold position, risk takers could venture back into the arena. Though most solar companies are up double or triple digits in the last three months, but given that they lost 80% or more of market cap a year before, they are still playing a catch up. But you have to be very selective and I suggest you sticking to the industry leaders. Suntech Power (STP) is a good start but LDK Solar (LDK) has problems. Trina Solar (TSL) has strong technicals but is fundamentally not as good in my judgment. If you are willing, get some Canadian Solar (CSIQ) instead.
High oil is good for Yanzhou Coal (YZC), the third largest coal producer in China. The price of coal is quasi international in China meaning that it follows international prices very closely. So as oil gets more expensive so is coal, making an easy case for Yanzhou.
Besides airliners, power generators are adversely affected by rising energy prices. Huaneng Power (HNP), the largest Chinese independent power generator, is thus hurting and I suggest you short it.