Each week a professional investor tells MoneyWeek where he’d put his money now. This week: Edmund Harriss, lead manager of Guinness China & Hong Kong and Guinness Asia Focus funds.
China has attracted praise and criticism. On the plus side, its economy expanded by 10.3% in 2010 compared to 2009 and has grown by a further 2.1% between December 2010 and March this year. However, risks for investors stem from concerns about liquidity created by explosive bank lending in 2009-2010, higher inflation (which reached 5.4% in March) and rising wages.
There is also the worry that investment spending is too dominant relative to consumer spending. The government and central bank seem to agree and since the start of 2010 have increased the amount each bank must set aside as reserves. Interest rates have also been increased four times since October. So where are the best opportunities for investors?
The efforts to increase the economic role played by the consumer hold the key. The Chinese are great savers, partly because of the absence of a welfare safety net. The introduction of basic health coverage and pension reform aims to cut precautionary saving. The government supports rising wages, which increase disposable income; it also means that less desirable, low-end manufacturing must move elsewhere.
An even greater change is the plan to build ten million units of subsidised housing in 2011 and the promise to provide 36 million over the next five years. In the short term, this means a construction boom. Longer-term new-household formation and private home ownership are powerful drivers of consumption. This was kick started in China following urban housing reforms in 1998-2000. The following three stocks are set to benefit from these trends.
China Liansu Holdings (HK: 2128) is the largest Chinese supplier of plastic pipes for construction. Due to their weight advantage over traditional metal pipes, these have a transport cost advantage. So with a market share of around 11%, Liansu can supply much of the country from its south China base. Given the ambitious house-building programme in the next five years, we think this stock is a hidden gem.
My second pick, Weichai Power (HK: 2338), is a Chinese maker of diesel engines for trucks and auto parts. The engine business has grown due to improved demand for trucks to support the government’s fixed-asset investment programme, and the opening up of new coalfields in Mongolia. The auto-parts business has been supported by strong car sales in China. In 2010, more passenger cars were sold than in America. In 2010 Weichai Power’s sales jumped 78% compared to 2009, while net profit almost doubled. There could be further growth for this firm in 2011, as it recently agreed a joint venture partnership with Caterpillar to manufacture auto transmission systems.
Finally, Sohu.com Inc (US: SOHU) is a Chinese internet media company. It provides information, entertainment and communication for individuals and corporate services, including brand advertising and paid-listings on its search engine. Internet usage in China has exploded, with the number of users reported to have passed 457 million. Over the last five years Sohu’s revenues have grown by 35% a year while profits have grown over 41% a year, on average. The business is attractive because it taps into growing consumer activity. The stock is reasonably priced relative both to its growth profile and the return on the capital it generates.