Comment today is by JUSTIN FORD, who has published, edited and written for newsletters on global investment for a dozen years, including his own letter on China business and investment. You may remember his reports from Panama City last May during our Annual Sovereign Society Offshore Opportunities Conference. Last week Justin was in Japan for the debut in Japanese of his book Seeds of Wealth. This week, he joins us in China to take another look at a fast changing country he first visited when the British Union Jack still flew over Hong Kong in 1997.
Dear A-Letter Reader:
As a boy, I was told that if I dug a hole and kept digging, I would wind up in China. This week, I took a jet instead. But I am indeed on the other side of the world. It's a world I've been to before - 8 1/2 years ago. But it's changed more in those few years than I've seen any country change in 30 years of living and traveling in dozens of countries throughout the world.
In June of 1997 China was counting down the days - literally, on large digital clocks in public squares - to the Hong Kong Hand over on July 1st of that year. Shanghai was a sleepy town for a cosmopolitan city. Its nightlife centered around the Bund, a district with neoclassical buildings that were once banks, trading houses, hotels and consulates during the European and American colonial period in the 19th century.
There were quite a few new buildings going up in Shanghai in 1997. But many were strictly functional eyesores. Many were dark too - forming a sort of pre-construction ghost town.
Today, I'm told over 1,600 new skyscrapers have been built in Shanghai since my last visit. I believe it.
Quite a few of these are still vacant - a nudge to the government that even the best central planning isn't likely to bring demand in line with supply. Yet, nonetheless, the vast majority of the new buildings are occupied - and many of them are occupied by a burgeoning middle class, as well as a small but growing slice of wealthy entrepreneurs.
Many of the ghosts have left. Shanghai is coming back to life.
A good number of the new buildings are far from the cookie cutter variety. Your correspondent is no expert on architecture. But I can tell you that quite a bit of the new construction goes far beyond utilitarianism. They are innovative and ambitious. You might even say they aspire - like hundreds of millions of Chinese - to be part of more than just a subsistence society.
Shanghai's downtown has expanded far beyond the Bund. Its shops, restaurants, clubs and hotels emit as much light and energy as you'll find in the choicest areas of New York, Paris or London.
I bumped into Andre Agassi in front of the Four Seasons Hotel on my way to The Tennis Masters Championship in Shanghai. At the Tennis Center, the world's #1 player, Roger Federer, was being cheered on in "Chinglish" by Chinese girls who draped an American flag over a balcony in the brand new, 15,000-seat tennis stadium, equipped with a retractable dome.
But let's not forget: this is the other side of the world. For over 20 years, the Chinese government has steadily loosened its reins on market forces. But it still holds the reins...
At the same time, many Chinese institutions retain vestiges of feudalism. Especially, in the provinces and smaller cities, you'll find the legal system is strongly influenced by personal connections and the rule of powerful men rather than the rule of law.
This is slowly changing, according to Professor Wang Chenguang, Dean of the Tsinghua University Law School. He told Sovereign Society members during our first session of presentations in Beijing that the concept of The Rule of Law has now been widely accepted. But it is not yet widely practiced.
However, over 300,000 Chinese law students and 80,000 law graduate students are now learning western legal principles. And Chinese authorities understand that is in their own best interests to continue to move towards a transparent and - as much as possible - impartial legal system.
Bertrand Theaud of the western law firm DLA Piper Rudick Gray and Cary in Shanghai told us that China's admission to the World Trade Organization four years ago has helped improve the litigation and arbitration process in China. Yet there is still quite a way to go.
Is the Horse Cursing the Mother?
I'm told there are over 30,000 Chinese characters (or "Canjie"). Each has a meaning in itself. Compounded they form new meanings. Yet the real hurdles for foreigners who would like to speak, read and write Chinese are the intonations.
If you were to write Chinese using the Arabic alphabet, you'd have to represent each letter four times since each has four different intonations. Because of that, the same "word" (as we would conceive it) can have many different meanings.
For instance, "ma" can mean "horse," "mother" or "argue," depending on the intonation. If you put it at the end of a sentence, it can also form a question. You may remember that Henry Higgins used "The rain in Spain falls mainly on the plain" to upgrade Eliza Doolitle's Cockney to the King's English. The Chinese often use the sentence "ma ma ma ma" -- or something to that effect. Depending on how you pronounce it, it means "Is the horse arguing with the mother?"
So it's all about the intonations. You have to be careful.
Yes, China is growing rapidly. But is it the mother of all investment opportunities... or a horse of a different color?
To sort out the opportunities and identify the pitfalls is the reason we are here in China on The Sovereign Society's Far East Financial Expedition. And we have some excellent local and global asset protection and investment experts to help us do that over the next few days.
Today, I'm going to share with you some of the ideas of Chris Mayer, a guest speaker on this tour and editor of the excellent global value investment newsletter Capital and Crisis.
Backdoor China Plays: How to Tap into China's Explosive Growth without the China sized Risk
In Hangzhou yesterday, Chris, a former banker, began by making sure cooler heads would prevail when looking at investment opportunities in the world's fastest growing economy. Like others on the trip, Chris was impressed by the tremendous development he has seen in China. Yet he pointed out that many investments were being sold as part of the China growth story at too high a price.
Hong Kong, Chris reports, has raised more money from IPOs in 2005 than any other market in the world, except the NYSE! And most of those IPOs have been for mainland China corporations. Chris's recommendation is that you do not join the crowd of hungry buyers gobbling up these IPOs at sky-high prices.
Baidu, for instance, is a Chinese Internet search engine. It debuted on the NASDAQ in August of this year. It more than doubled on its first day of trading. Yet it currently trades at about $68, down 55% from its former high. And, at 15 times book value and 149 times estimated forward earnings, it could go a lot lower yet.
Instead, Chris thinks there are far safer ways to target China-sized profits. These are the Backdoor China Plays.
Tunneling to China from South Carolina
Chris's number one pick is a diversified manufacturer of electronics components related to storing, filtering and regulating electric energy in products ranging from laptops to DVDs.This China play is based far from the hustle, bustle and fever pitch of Beijing and Shanghai. The company's name is AVX Corp.And since 1972 it has been headquartered in Myrtle Beach, SC.
Not surprisingly, AVX sells the bulk of its components to electronics manufacturers in Asia. In fact, a few years ago, a controlling stake was purchased by one of its key customers, Japan's Kyocera -- a maker of digital cameras, cell phones, printers, copiers and network wireless systems, among other products.This, Chris believes, strengthens AVX's ability to market in Asia. But, most importantly, Chris finds AVX to be a compelling value play.
The prospect for rising demand for its products is excellent since the trend has been for a greater number of components in electronics products. Intel's first chips, for instance, consisted of about 250 components. Today they number over 1,000. A similar trend has occurred in automobiles in recent years. At the same time, the company manufactures 85% of the components used in laptops.
Today, you can get these compelling business dynamics at an excellent price and with a rock solid balance sheet. The company has no long-term debt, a significant war chest of cash and has been overlooked by Wall Street.
Earnings are up 175% on a quarterly basis and are expected to grow at 15% a year over the next five years. The stock has begun a sharp move upwards, rising 20% in the last month. Yet it trades at 70% off its high of 2000. Chris believes it offers a very good chance for a double or better within the next 24 months.
Two More Low risk Ways to Ride the China Boom
Chris revealed two more Backdoor Plays on China. One is a Canadian fertilizer producer. The company stands to benefit from China's growing wealth and growing appetite for beef. Sales and earnings are up over 50% in the last two years, yet the company is selling for just 8.5 times trailing earnings.
Chris's 3rd Backdoor China Play is a Bermuda-based re-insurer whose global business has nearly tripled in the last two years. Yet the company sells at just over one times book value and at about a 50% discount to its industry on a price-to-sales and price-to-earnings-growth basis. And as China's burgeoning middle class begins to demand life insurance and other types of insurance, the growth prospects for this value priced company remain excellent.
The details of AVX and these other two low-risk/high-potential-reward China plays are revealed in The Sovereign Society's Far East Financial Expedition Audio Series. Copies of Chris's presentation handouts and those of select other speakers will be included with the audio presentations of our investment and asset protection speakers in Hong Kong. The series will be available for download (along with PDF files of select presentation handouts) next Tuesday, November 22.
During the conference, you can order the series at a special pre-release price of just $99. Members of The Sovereign Society pay just $79. Both offers represent a $30 savings off the full prices once the conference is concluded.
More to Come...
I have a great more to tell you about in the next few days...touring The Forbidden City with the author of Forbidden Knowledge...eating a cup of tea in Hangzhou...culinary adventures from Peking Duck and Dim Sum to sliced jelly fish, boiled chicken feet and crispy spring pigeon...a business meeting at The Great Mall of China...and a few investment and asset protection ideas you may find useful.
I'm a bit pressed for time now. But I want to give you a preview of the way I look at it right now. Here's the punch line...
There are many Buddhas in Mahayana Buddhism, the principal type of Buddhism in China. One trio consists of the past, present and future Buddhas. The future Buddha is represented as laughing. I think he has good reason to.
I'm extremely bullish on China's future. However, China's growth will not be without growing pains. And growth by itself does not make a good investment. Value and a measure of stability and transparency are also needed.
I'll fill you in over the next few days on what top financial experts at our conference feel are the best ways for you to profit from the undeniable China Boom now. In the meantime, you may want to take advantage of The Sovereign Society's special offer and get the entire Far East Financial Expedition Audio Series (and PDFs of select presentations) for $30 off the full price.
Zai Jian (See you tomorrow),
Justin Ford
PS To order the Far East Financial Expedition Audio Series and PDFs, click here:
LINK: Order Here