ASIA'S RAILROAD TO RICHES
by Yiannis G. Mostrous
Editor, Growth Engines
March 14, 2008

The current market weakness presents an excellent opportunity to buy Asian stocks.

Although the state of the US economy and the global credit crisis is gloomy, and it’s on track to remain so for some time, the global financial system won’t completely collapse. It seems that the US monetary policy is losing credibility, which will be difficult to restore to previous levels. But the order of the world is changing, and everyone wants to avoid total destruction.

Don’t underestimate the probability for a rally, bear market or otherwise. Few investors with whom I’ve spoken expect a strong rally. And when the majority doesn’t expect something to happen, it usually takes place anyway. Only time will tell; a few momentum indicators aren’t confirming just yet. But there’s a risk on the upside at these levels.

This is the year that Asia will consolidate and get ready for the next leg up in this long-term bull market, which commenced at the bottom of the Asian Crisis in 1998.

And what a difference 10 years makes. Before the Asian Crisis, the region was in a tailspin: Everyone from this side of the globe gave advice on how Asian countries should deal with their liquidity/credit problems. Asia was forced to follow the path of tighter credit and prudent economics.

Although this advice almost destroyed the region, it also helped the economies sober up to get their finances and businesses back in order. This is why the Asian Crisis is so important to the fundamental case for investing in Asia.

The western financial system is going through a similar problem right now: Debt levels are high, and no one really knows who owns what, particularly in terms of collateralized debt obligations (CDO) and the like. The difference now is that few advocate the hard medication that was prescribed for Asia back then.

It’s true that Asia can’t go it alone yet because it’s not big enough. China and India consume around 10 million barrels of oil per day, while the US alone consumes 27 million. This is why the longer the developed economies stay above water, the best it will be for everybody. Asia and other developing economies such as Russia and the Gulf states will continue to contribute to saving the banking system (i.e., cash infusions to big banks) and hope for the best.

On the long side, the strategy for this year remains quite simple: Buy quality companies that offer long-term growth potential, but also keep some hedges on for good measure.

At the end of the day, I want to be invested where the growth is and the economic fundamentals are in good shape. And that place is Asia.

Buy Infrastructure

Chinese investment in transportation infrastructure continues with railways in the driver’s seat.

Until recently, infrastructure--particularly in Asia--focused on road building. China alone has built 820,000 kilometers (km) of new roads over the past decade, spending USD53 billion in the past five years alone. In 2006, China’s highway investment reached USD81 billion, surpassing the USD72 billion the US spent.

India, on the other hand, has added only around 470,000 km over the past 10 years. In 2006, India spent USD6 billion on roads, a drop in the bucket compared to its needs and to China’s efforts. Furthermore, much of India’s road network is of low quality, with many single-lane and two-lane roads that slow traffic.

According to the Chinese government’s plans, the national railway network’s total length should reach 90,000 km in 2010 and 100,000 km in 2020 from 75,000 km in 2005. Fifty percent of the total is expected to be double-line rails (one of which can be electrified) and outright electric. The plan calls for the construction of eight passenger transport lines and three intercity high-speed railway transportation systems, and enlargement of as well as improvement to the existing network.

Given that Chinese passenger and freight transportation has been increasing at an average of 18 percent a year, the government’s urge to upgrade and expand transportation is logical. China is planning to spend more than USD170 billion updating its railways, and construction machinery companies should benefit because around 46 percent of the rail investment goes to construction.

China Infrastructure Machinery (CIM) is the only Chinese heavy machinery company that individual investors can easily access because it’s listed in Hong Kong. It’s the second-largest loader producer in China under the brand name Longgong. It’s also diversified into producing forklifts and excavators recently, which should help future earnings growth.

The company’s success is founded on its excellent marketing techniques (sales are up 36 percent per year in the past three years) and low pricing. Forty-three percent of CIM’s sales come from road, railways and bridges, so the company will be a big beneficiary of the boom.

CIM is expected to surpass competitors and become the largest loader producer in China by sales volume. Because of its success, the company is planning to allocate more money in its research and development (R&D) program in order to improve quality.

China’s construction machinery industry has become the third-largest producer in the world behind the US and Japan; 2006 marks the year that China became a net exporter. Chinese companies have been gaining market share around the world. Developing regions such as India, Africa and the Middle East are rapidly becoming big marketplaces for these companies.

Although CIM isn’t one of the biggest construction machinery companies in China, it is one of the most profitable, and it’s coming strong from a low base. For instance, the new product lines introduced in the last couple years--forklifts and small excavators--have been growing strongly.

The company is expected to sell just more than 700 excavators this year, up from 44 in 2007. And the same kind of growth is expected in the forklift division. CIM is also one of the cheapest stocks in the sector and boasts one of the higher returns on equity (ROE) at 40 percent.

The Mechanics

I prefer the local shares to the over-the-counter (OTC) listing. And because Hong Kong is easily tradable through serious brokers in the US as well, I strongly recommend you buy the stock locally.

Not every brokerage is coming along. Some simply don’t want to expend the effort needed to open their business beyond the domestic market. 

Interactive Brokers’ trading platform offers easy access to US-, Canadian-, European-, Japanese- and Hong Kong-listed stocks alike, among others. The company boasts cheap commissions and also has a great system for handling currencies. You can choose to convert all or part of your account into British pounds sterling or euros to handle buys in Europe at favorable rates. The minimum amount to open an account is USD10,000.

A more mainstream broker that can now handle some international trading online is E*Trade. Commissions are slightly higher, and the Web site is particularly easy to use with solid news and quote feeds for most foreign markets. Note that the brokerage operations are entirely segregated from the firm’s troubled mortgage operations and are federally insured as well.

This is by no means an exhaustive list. If you’ve had positive experiences buying foreign stocks with other brokers, please drop us an e-mail, and we’ll include them in an upcoming issue.

© 2008 Yiannis G. Mostrous
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