Jan. 5, 2010 (Chinavestor) What a difference one year makes! The title of the January 2009 Newsletter said “Thank God 2008 is over!” This is in sharp contrast to 2009 when stock indices rocked world wide with the Shanghai Composite Index advancing 80%! Or how about the NASDAQ composite 43.9% performance for the year?
Stocks mentioned in this report include Petrochina (NYSE:PTR), Aluminum Corp. of China (NYSE:ACH), China Petroleum & Chemical Corp. (NYSE:SNP), LDK Solar (NYSE:LDK), Suntech Power (NYSE:STP), Ctrip.com (NASDAQ:CTRP), City Telecom (NASDAQ:CTEL), Sohu.com (NASDAQ:SOHU), Sina Corp. (NASDAQ:SINA), and China Mobile (NYSE:CHL).
Less enthusiastic old timers have a point too saying that most of this advance is due to a correction following a disastrous 2008 performance. Or even worse, the first ten years in the new millennia is a decade lost when it comes to equity investing. The Dow recorded a loss of –9.3% for the last ten years, its second poorest after the 1930s. The NASDAQ fell harder diving -44.2% for the last ten years.
But optimists point out that despite an historically weak performance for the decade, the rally in 2009 have legs and may extend well into the first half of 2010. This is more true for China then for the United States because all economic indicators suggest that China’s economy is on track to come out of the recession stronger then ever.
Take a look at the list of the latest economic news from China: December manufacturing activity expanded the most in five years suggesting that GDP growth will surpass 10% for the last quarter of 2009. The December purchasing managers’ index reached 56.1, well over 50, suggesting China is experiencing strong expansion all across the board. This reading is the strongest since April 2004, records show.
Another positive development is that profits of industrial companies continued to rise and reached a record RMB2.59 trillion ($379 billion) for the first 11 months of 2009. Record profits translate to higher earnings, keeping the all important P/E measure at bay for Chinese companies.
Assuming China will not derail from current macro policy and continue to pump liquidity into the economy, Chinese shares are expected to outperform for the first six months of 2010.
Private investment is expected to pick up in the first six months of 2010 on the back of strong domestic demand and improved export outlook. Assuming China will grow at an annual rate of 8% or more in the first six months of 2010, a wide range of domestic consumption related sectors are expected to do well. Based on various sources, RMB 74 trillion ($10,5 trillion) worth of new projects have been started in 2009 with an additional RMB 9-10 trillion ($1.280 billion) expected to kick in during the first six months of 2010. This boom in investment will trickle down to a wide range of industries like furniture, home appliance, consumer staples, etc.
The second pillar of the Chinese economic growth is strengthening export orders. As the global economy is regaining its health, export orders from China are expected to bounce back up. Christmas sales numbers suggest the U.S. consumer, though price savvy, is spending despite high unemployment. Economies in Europe have been returning to growth in the second part of 2009 as well.
The third pillar of Chinese economic growth is government stimulus packages. Investors should not forget that most of China’s economic mojo in 2009 started back in November 2008 when Chinese policy markers unveiled a massive, RMB 4 trillion ($586 billion), stimulus package. Despite record lending throughout 2009, China has more than enough financial muscle to pump additional liquidity into the financial system, if needed.
Strengthening inflation and asset bubbles present risk but more in the longer term then in the first six months of the year. According to the latest statistics available, consumer prices rose +0.6% in November, ending a nine months long deflation.
Despite some downside risks, detailed above, we’re very bullish about Chinese stocks in the first six months of 2010. We don’t have more visibility than six months but that should not deter investors from diving in. One of our clients has just returned from China and sent a note along with the photo, saying that “I just came back from a long vacation trip from HK and China. It is hard to believe the level of activity and stock IPO excitement in HK. I don’t see or feel any sign of recession there; people are busy shopping and every restaurant was packed with customers.”
Going stock and sector specific, we highlight the following opportunities ahead.
Energy stocks are expected to do better in 2010 than in 2009. We had China Petroleum & Chemical (NYSE:SNP) and Sinopec Shanghai Petrochemical (NYSE:SHI) in the Conservative Portfolio for the first eight and six months of 2009, respectively. CNOOC Ltd. (NYSE:CEO) replaced Sinopec in the second part of the year, an excellent call. We anticipated stronger oil prices to stay hurting profitability of upstream companies like SNP and SHI. CNOOC ltd. (NYSE:CEO) advanced 24% since September 2009 boosted by strong crude prices. Looking forward we expect oil price to stay above $70 a barrel, benefitting Chinese oil producers such as Petrochina (NYSE:PTR) and CNOOC ltd. (NYSE:CEO).
Besides Petorchina (NYSE:PTR), we had China Mobile (NYSE:CHL), Aluminum Corp. of China (NYSE:ACH) and China Southern Airline (NYSE:ZNH) for the full year in the Conservative Portfolio. Aluminum Corp. of China (NYSE:ACH) advanced 82% in 2009 followed closely by China Southern Airline (NYSE:ZNH). We remain bullish about ACH but less enthusiastic about Chinese airliners. Higher kerosene costs, high burden of debt financing and increased competition suggest that it’s better to take the 80% profit now.
China Mobile (NYSE:CHL) was sluggish in 2009 but her weak performance was not limited to one stock; the whole Chinese telecom market was underperforming. Lack of 3G subscriber growth is the primary reason for such a soft performance but that is about to change in 2010 as all three main carriers have rolled out a fully operational 3G network. We expect China Mobile (NYSE:CHL) to benefit despite all odds, associated with her home grown TD-SCDMA network protocol. This is our most non-consensus call but we think sector rotation will lift Chinese telecoms with China Mobile (NYSE:CHL) taking the lead.
We have turned bullish on the Chinese solar sector back in September, well before Q3 earnings started to come out. While we were less successful with LDK Solar (NYSE:LDK) in the Conservative Portfolio, our bullish attitude helped Advanced Members to take advantage of JA Solar (NASDAQ:JASO), Suntech Power (NYSE:STP) and other solar plays via the Weekly Stock Buy List. Looking forward to 2010 we remain bullish about the Chinese solar sector based on valuation, revenue and profit outlook.
The NASDAQ listed China stock universe, a group of stocks we preferred when it comes to the Growth Portfolio, produced a very exciting 2009.
Rotation in and out of the Growth Portfolio surpassed that of the Conservative one simply because NASDAQ listed China ADRs are much more volatile. Some of the highlights of the Growth Portfolios in 2009 include Baidu.com (NASDAQ:BIDU), China’s premium search engine company, that advanced +177% from January—October. We suggested our members taking profits off the table after such a rally, a wise call given the additional extreme volatility in the last quarter of the year. We remain bullish of the stock however based on fundamentals.
Ctrip.com (NASDAQ:CTRP) was another excellent stock in the Growth Portfolio in the January—September period. We suggested profit taking but that proved to be too early, given that CTRP delivered another robust Q3, sending her shares higher for the rest of the year. Nevertheless we have no regrets when it comes to Ctrip.com (NASDAQ:CTRP).
City Telecom Ltd. (NASDAQ:CTEL) was an excellent call for the first five months of 2009—however we called the shots too early. CTEL continued to advance throughout 2009 but we made the “better be safe then sorry” call at the end of May.
Sina Corporation (NASDAQ:SINA) was a stock that we kept in the Growth Portfolio throughout the year, a decision that proved to be prudent. Sina Corp. (NASAQ:SINA) advanced 88.58% in 2009 largely contributing to the 50% plus overall performance.
We had Sohu.com (NASDAQ:SOHU) in and out with modest success— a combined 24% gain for the whole of 2009.
We timed NetEase.com (NASDAQ:NTES) right by adding this online game developer and operator to the Growth Portfolio in July. There was nothing wrong with her +12% gain in short two months.
We made a couple of successful calls on Shanda Interactive (NASDAQ:SNDA) in the first part of the year, the other leader of the online game sector.
Updates to the Conservative and Growth Portfolios are available for subscribers only and as such we can’t go stock specific here. But we continue to like stocks that are leaders within their industries, have strong cash flows and proven track records of constant revenue and earnings growth.