An Investor’s Tour of Hong Kong Part I

Today’s comment is by our guest writer, Tony Chan. Tony is General Manager of Fiduciary Services at Global Consultants and Services Ltd. Tony is based in Hong Kong with our Asian correspondent, Jack Flader. Tony has worked in Hong Kong and Asia for over 10 years in stock-broking, banking and now fiduciary services. 

Dear A-Letter Reader,

As The Sovereign Society’s Asian Advantage Tour draws closer, it is with great pleasure that I give you some tour notes on the investment side of my hometown – the bustling city and gateway to China – Hong Kong. 

Specifically, I would like to highlight the sectors, businesses and companies that are worth considering here from a local investor’s perspective in Hong Kong. However, these notes are by no means investment recommendations. If you’re looking for specific recommendations, you should consult one of the investment experts during the upcoming tour.

Rather, my tour notes are in the style of Jim Rodgers’s book “Investment Biker.” I want to give you an idea of what investment themes to look out for, some background information on each, and explain why everybody is so excited about these particular opportunities in this part of the world.

Most of the companies I’m discussing are listed on stock markets and I have added the symbols for convenience. But once again, neither my firm GCSL nor myself are investment advisors and I’m not offering investment advice here. I’m just giving you a glimpse at my hometown. With that caveat out of the way...here goes.

Flying to Asia’s Travel Hub

If you join us on the tour, you will land in Chek Lap Kok airport. It’s one of Asia’s most modern and busiest airports, which serves over 80 international airlines and provides more than 5,000 flights per week to more than 150 destinations.

In addition to being a regional transport hub for Asia (similar to L.A.’s international or New York’s Kennedy), Chek Lap Kok is one of the largest international air cargo handlers in the world. This airport had a throughput of 3.6 million tons in 2006. The airport is cited to go for a listing on the local stock exchange in 2008 as the government is looking to partially privatize it.

The local airline, Cathay Pacific (stock code 0283.HK), is Asia’s second most profitable carrier after Singapore Airlines. Cathay is the dominant international carrier flying into 104 international routes and 30 routes in China thanks to its recent acquisition of Hong Kong’s other airline, Dragon Air.

Why a Railroad is Now a Property Play

You may take the high-speed train from the airport. This train will whiz you directly into the heart of Hong Kong’s Central business district. The railway is operated by the MTR Corporation Limited (0669.HK), which also operates Hong Kong’s subway system.

MTR (“Mass Transit Railway”) has recently merged with the government-owned railway company: Kowloon-Canton Railway Corporation. With this merger, MTR now fully operates all of Hong Kong’s domestic subway and rail networks.

But the real value of the merger lies in property concessions. MTR is now able to develop the stations and surrounding government land for retail malls and private housing developments. The MTR makes 65% of its revenues from property sales and rental.

The World’s Busiest Container Terminal

The airport train will speed you across the world’s largest suspension bridge – the Ching Ma suspension bridge. As you cross it, you will see Hong Kong’s container terminals located on the coast of Kwai Chung. The port handled a total of 22.42 million TEUs (“20-foot equivalent units”) in just 2005 alone.

Hong Kong is a major logistics hub for several reasons. First, Hong Kong is the gateway to the Pearl River Delta – China’s highly industrialized area and production plant to the world. Hong Kong is also a free port, where there is no tax for imports or exports. And finally, Hong Kong is one of the most modern and efficient deep port facilities in the world.

Port Operators such as HIT – owned by Hutchinson Whampoa (0006.HK) and Wharf Holdings (0004.HK) – unload ships from large carriers such as COSCO Pacific (1199.HK) and China Merchants (0144.HK).

Central – Where Bankers and Tai-Tai’s Collide

As you arrive in Central, you will see one of the world’s most magnificent city skylines with gleaming skyscrapers dotting the landscape.

The tallest building is the International Finance Centre (IFC), where rentals reach and surpass Manhattan’s madness in price. These properties rent for in-excess of US$20 per square foot per month for offices and US$30 per square foot for retail outlets. Nearly all of the 4.7 million square feet is fully leased out.

The surrounding shopping mall and 5-star Four Seasons Hotel are both a joy to walk through. You’ll see rich bankers come down from their office towers to the mall to mingle with richer Tai-Tais. Tai-Tais are rich wives of wealthy businessmen, who don't have to work, so they enjoy most of their day spending money on the house and themselves. If you visit Central, you’ll generally see Tai-Tais spending their cash on food, clothes and high-end expensive consumer items.

Property – Hong Kong's Biggest Game

The developers of IFC are Sun Hung Kai Properties (0016.HK) and Henderson Land (0012.HK) – probably two of Hong Kong’s best and biggest property developers. They also own a lot of residential property projects throughout Hong Kong where there is a shortage of housing and a growing population.

The Hong Kong property sector is a no-brainer investment for locals. There is an extremely tight supply of land because the government only releases a few plots of land per year for sale, and the population is growing. However, constant speculation by locals has caused property prices to spiral up and down – good news for property developers, bad news for home buyers.

The Great “Hongs” Past and Present

If you join us for the Asian Advantage Tour, you will be staying in Mandarin Oriental (MOIL.SI.), one the most luxurious hotel chains in Asia.

The Mandarin Oriental is partly listed and partly owned by the Jardines’ group. The Jardines’ group also happens to be Central’s largest landlord through its other listed subsidiary Hong Kong Land (HKL.SI).

Jardines’ roots date back to opium trading in the colonial days, which means they’re still not favorites of the Chinese government. Jardines is one of many foreign-owned conglomerates known as “Hongs,” in Chinese.

Today the Jardines Group is listed in Singapore and offers an interesting play into Hong Kong as they often trade at a discount to other local property counters. Plus, this company remains the dominant landlord in the business district.

Chinese Super Banks

The other local “Hong,” with an illustrious colonial past, is Hong Kong and Shanghai Banking Corporation (0005.HK) or HSBC.

Starting as the merchant bank for trade ships moving along the East-West routes, HSBC today is a powerhouse of international banking. This global super bank handles global retail, corporate and investment banking clients from around the world. Even though HSBC now rivals huge conglomerates like Citigroup and UBS, HSBC’s roots still remain in Hong Kong with its headquarters based in Central.

HSBC isn’t the only bank worth noting in Hong Kong. Other China super banks are emerging throughout Hong Kong. Industrial Commercial Bank of China - ICBC (1398.HK) is one of the four state banks that were listed in Hong Kong in 2005. Due to its sheer size and soaring stock price, ICBC at one time had a market capitalization of US$254 billion. That means their market capitalization exceeded the US$251 billion capitalization of Citigroup.

At the time, most were shocked that China had the world’s biggest bank!

In addition, the other banks that make up the “Big 4” as they are known are:  China Construction Bank – CCB (0939.HK), China Agricultural Bank (plans to list in 2008) and Bank of China (3988.HK). 

You may walk around into the giant banking halls of HSBC and Bank of China, two very distinctive buildings known for their architectural rivalry as well as their banking rivalry within the city landscape.

The Financial Floodgates Are Finally Open

There’s never been a better time to come to Hong Kong – with the profit windfall heading straight for this city.

Let me explain. A recent landmark ruling from the mainland Chinese government will soon allow Chinese retail investors to finally take advantage of Hong Kong markets.

China officials were worried about the mainland stock bubble and buildup of excess liquidity (hot money) chasing the runaway stock markets in Shanghai and Shenzhen. So they ruled investors could finally send funds overseas and straight into the coffers of Hong Kong stock market. 

In a pilot scheme announced on August 20th, China local retail investors will very soon be allowed to invest directly in Hong Kong stocks, bypassing the over-hyped mainland exchanges. This program is initially limited to one city within China, but if successful, the scheme will spread to other cities like Shanghai and across the nation. China always deregulates slowly on a city by city basis to ensure an orderly flow of funds and not a flood of money if they were to open the floodgates suddenly.

As the sole beneficiary of this vast money flow, the impact on the Hong Kong stock market should be tremendous.

China investors will start to invest their funds into familiar H shares – state owned companies that are listed in Hong Kong, as well as Red Chips (Hong Kong companies that derive all their income from China businesses). You might have heard of the Red Chip bubble in 1997, when China mania caught on to China related shares. This time is different as the fundamentals are there to support the valuations. Yes, real businesses with real earnings are flourishing in China.

Shares Hit Record Highs in Hong Kong

Shares of the Hong Kong Stock Exchange (0388.HK) have already hit new record highs as turnover soars. Other beneficiaries would be listed stockbrokers like Quamnet (0952.hk) and Sun Hung Kai Financial (0086.hk) as well. Also, you may want to consider the Bank of China (Hong Kong) (2388.HK). Right now, the Bank of China is the main bank handling all the settlement and trading for the Chinese red tide.

That’s just a tiny glimpse. And quite honestly, there’s simply too much to cover in one article on Hong Kong’s investment opportunities. So tomorrow, we will continue our investor’s tour by taking you shopping around the City, going across the border into Shenzhen, China and across to Macau – the Las Vegas of the East.

TONY CHAN, General Manager
Fiduciary Services
Global Consultants and Services Ltd
Central Hong Kong
tony@gcsl.info

EDITOR’S NOTE: Luxurious 5-star hotels. Glittering skyscrapers. Shopping districts bustling with Tai Tais. And more importantly – soaring stocks and value-driven real estate. You will find it all when we stop in Hong Kong (between our stay in Singapore and Thailand) for four days during our Asian Advantage Tour, October 12 – 25. Still considering joining us? Call our Director of Membership Services, David Newman right now at 1-866-765-7506 to secure a special discount.

Grow Your Wealth in the World's Freest Economy

Long ago and far away, there was a place where capital gains escaped the greedy arms of government. Sounds like a fairytale, doesn't it?

Well, you'll be pleased to know that this land of plenty is located in the here and now of 2007. The Wall Street Journal, Cato Institute and Heritage Foundation have rated it the world's freest economy.

Here's why:

• Tax-free capital gains!
• Corporate tax rate of 17.5%
• Personal income tax rate of just 15.5%
• One of the world's shortest tax returns -- just two pages

The Money Police Are Hiding Behind “Privilege”

The news last week reported that the Bush administration plans to exercise their “state secrets” privilege. They plan to use again this dubious legal tool to try to stop a lawsuit against Belgian banking cooperative, the Society for Worldwide Interbank Financial Telecommunication (Swift).

According to court documents, Swift secretly supplied millions of private financial records to the United States government. The suit alleges that Swift, in secret cooperation with the U.S. government, violated the privacy of an untold number of persons by allowing the U.S. access to Swift cash transfer records. 

Swift is a privately run cooperative founded in 1973 and headquartered in Brussels, Belgium that electronically transmits trillions of cash transfers every day to more than 200 countries. The network handles some nine million transfer instructions and confirmations a day with a value of about US$6 trillion.

Swift is considered the nerve center of the global banking industry. This cooperative routs trillions of dollars each day to banks, brokerage houses and other financial institutions. Its secret partnership with Washington, reported in The New York Times in June 2006, gave U.S. Central Intelligence Agency and the U.S. Treasury Department access to millions of records on international banking transactions.

This massive access was part of an effort to trace money that government police claimed might be linked to financing terrorism. The Justice Department claims that the suit against the Swift consortium threatens to disrupt the operations of a vital national security program and to disclose “highly classified information” if it continues.

No doubt the Bush officials don’t want the world to know just how great a violation of the privacy of millions of people may have been.

In my opinion, you better believe that the U.S. money snoops who say they are looking for terrorist cash are also looking for tax evasion, money laundering of all kinds and any other indictable offenses. And they are doing this in violation of the Fourth Amendment, which guarantees against illegal searches without a warrant.

The question now is whether the U.S. government money police will be allowed to hide behind the “state secrets” doctrine and conceal just how far they have gone in violating everyone’s privacy.

BOB BAUMAN, Legal Counsel

Wealth

Here's an Option Play You Can LEAP on Right Away

In yesterday's A-Letter comment (A Powerful Way to Profit in a Volatile Market: Options Trading 101), I described the leverage and big profit potential you can get from a simple strategy of buying call and put options.

Another options strategy I discussed on CNBC was using LEAPS options (or Long-Term Equity Anticipation Securities). I really like LEAPS because they give you similar leverage to standard options, but over a much longer timeframe.

Most standard options have an expiration date that’s 30, 60 or 90 days away, and that time flies fast. But with LEAPS, you’ve got a year, 18 months, or even two years to wait for a big market move to play out.

Right now, I'm following several LEAPS call options on a few emerging market ETFs. These call options have performed well this year, but sold off in the recent correction. Some of these LEAPS look relatively cheap right now, and offer substantial upside once the market settles down. 

For instance the iShares FTSE/Xinhua China ETF (symbol: FXI) is a great case in point. This ETF offers terrific longer-term profit potential tracking China stocks. In fact, this ETF has already jumped more than 30% higher this year, even after the recent market correction.

Another way to play this potential, and at a much lower cost, is to buy LEAPS call options on FXI. For example, right now you can purchase a January 2009 LEAPS call option contract on this ETF for just over US$2,000 plus brokerage commissions.

This option provides you with the “right” to the appreciation potential of 100 shares of FXI. The best part is you’ve got nearly a year and a half – 17 months to be exact – for this ETF to make its next big move, handing you profits on the trade.

Alternatively, you could purchase 100 shares of FXI outright, but that would cost you about US$15,000 – which is more than seven times the cost of the option.

Now, for many experienced investors that’s not a lot of money in the context of your total portfolio size. But it’s still 15 grand of your capital that’s tied up while you wait for this trade to play out.

By purchasing the FXI LEAPS instead, you’re only tying up US$2,000, and you’re still participating in the upside potential for almost a year and a half – until January 2009.

Just to give you an idea of the possible upside potential, the last time this China ETF made a big move in June and July, the near-term call options on FXI soared about 500%! That was in just over 30 days! Just take a look at the chart below!

MIKE BURNICK, Senior Editor & Global Markets Analyst

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