I've been writing over the past month about some of the ideas our crack analysts unearthed for Stocks 2004. We've discussed a defense contractor, a clothier, and a tire company. Please, try to contain your excitement.
These industries are not exactly in the forefront of investors' minds, the ones that tend to induce shivers of greed among our nation of speculators. Which is as it should be, because the bargains aren't where everyone else is looking. Ah, but today we're going to go against trend a little bit. We're going to talk about the one company that was in Stocks 2004 that I happen to own.
And it's in China.
Unless you spent the last half of 2003 dead, you could not possibly have missed the euphoria over all things Chinese. "The great growth engine!" "The tiger/dragon/powerhouse/cebu of the 21st century!" Everyone, everywhere, it seems, is onto the fact that China's economy is growing.
And the Chinese government is just as aware of others' awareness. It has capitalized on the hype over the past few months by obtaining U.S. listings for scores of state-owned companies to go along with existing Sino-centric ones.
You have the momentum-type investors who piled into high-priced pipe dreams such as Sina.com (NASDAQ:SINA), Ctrip.com (NASDAQ:CTRP), and Chinadotcom (NASDAQ:CHINA). After Berkshire Hathaway (NYSE:BRK.A) took a 13% stake in Chinese oil giant PetroChina (NYSE:PTR), legions of investors, not inclined to care about stock popularity trends, sat up and took notice of what is transpiring in the Middle Kingdom as well. Unfortunately, any bargains in the Chinese energy industry disappeared under the resultant stampede.
Fortunately, we aren't investing in countries; we're investing in companies. Matt Richey turned up a stock idea that was so compelling, complete with some margin of safety, that its status as a Chinese company is almost beside the point. Almost, because in each of these situations, you must always remember that your rights as a minority owner of a Chinese company are deeply limited. One should never be sanguine about what could go wrong with a company from any emerging market.
Still, I liked the potential of this particular company at current prices, so I sidled up to the bar and took a drink. It's a transportation company, owning monopoly rights for routes in Guangdong Province, the highest-growth area in China. This company has spent hundreds of millions of dollars improving its physical plant and infrastructure over the last five years, which means the high levels of capital expenditures should begin to decline.
It's also set to enjoy increased traffic, as travel restrictions between China and Hong Kong continue to be eased. Hong Kong is included in this company's route network, and its profit margin on Hong Kong traffic is four times what it is in domestic China.
One last thing: this company pays out a dividend exceeding 4%. So, while you may have to wait for some of the catalysts to play out, you may appreciate some cash return on your capital.
I liked this idea enough that I bought it -- in spite of some severe misgivings about what is going on in China. Its stock has largely been passed over in the frenzy, but when things cool off and Chinese companies return to more sane valuations (I should say "if," but I'm confident a retrenchment will take place), I don't expect this company to get hit. The company's potential for fundamental improvement, whether China grows apace or not, translates to investors' independence from the current mania. And that can only spell auspicious times to come.
Bill Mann is the editor of Stocks 2004. He holds shares in the company featured in this article, as well as Berkshire Hathaway.
