A professional investor tells MoneyWeek where he’d put his money now. This week: Mark Williams, director and fund manager of the F&C Pacific Growth Fund.
I believe the recent market correction in Pacific equities is just a blip; the growth story for the region’s most populous nation, China, has not changed. The start of 2006 has seen economic growth break though 10%, with domestic and export growth surprising analysts. This growth is also broadening out across the domestic economy and discretionary spending will continue to contribute to growth.
Discretionary spending is still at a relatively low level, but it is gathering momentum, fuelled by the move away from a largely agrarian to an urban society. Urbanisation has provided a boost to China’s earnings potential and spending power. According to statistics from the United Nations Population Division, this process will continue – China’s rural population is predicted to drop from current levels of just under 70% of the total population to less than 40% by 2030. China’s agricultural sector is also benefiting from the price increases in soft commodities such as cereal and rice, and traditional coastal exporters are continuing to boom, producing a growing market share of the US’s imported goods.
China’s growth potential has not gone unnoticed. The commerce ministry says that cumulative foreign direct investment in the first five months of 2006 rose 2.8% to $23bn compared to the same period a year ago. To finance infrastructure spending on the scale that China is usually requires firms to take on debt or issue equity, but in the case of China, capital expenditure is being largely financed by cash flow. This gives hope that the current expansion may not have to come to a sudden halt. The Chinese government is trying to dampen growth to avoid a bubble, but they have been specific in their targets and in previous cycles have avoided starting a crash.
China’s commitment to infrastructure spending remains a driver for the economy. The country is building enough railways to span the world at least twice, illustrating the scale of demand for commodities. Elevators and escalators are one industry sector that will benefit from this spending. At the moment, China has only a 27% share of the world escalator market and 8% of the elevator market – these are bound to rise in line with growing urbanisation. Hyundai Elevator (KS.1780) in particular has caught my eye. It is valued at a forward p/e of 4.7 and is expected to benefit from the recent drop in steel prices. It also holds a stake in Hyundai Merchant Marine, equal in value to 75% of Hyundai Elevator’s market capitalisation, providing support for the shares. Poor historical management in Korea has led to its companies trading at a discount to global equities, but this appears excessive in the case for Hyundai Elevator, where
the discount is too steep.
Another firm I feel is undervalued and a likely beneficiary of the trend in infrastructure spending is Jiangxi Copper (HK.358). The share price of this Chinese copper refining firm, on eight times earnings, was badly hit in the recent correction. Since then, copper prices have recovered to within 10% of their highs and inventories, as measured by the London Metal Exchange, have been trending down. Its strong cash position will enable it to pay a significant dividend to share¬holders, or acquire mines from its parent firm, either of which should support the share price.
The stocks Mark Williams likes
12mth high 12mth low Now
Hyundai Elevator (KRW) 96,000 49,200 70,000
Jiangxi Copper (HKD) 9.75 3.55 7.35