Stock market
China TechFaith also disappoints:
From Reuters, UPDATE 2-China TechFaith gives weak Q3 outlook; to cut jobs. So CNTF is following Spreadtrum SPRD’s step. Don’t try to bottom fish on them yet! I expect the handset business in China continues to be challenging, for the near future.

The broader market:
The US market goes sideways as financials and consumer spending continue the downward pressure. In China, the mood is much pessimistic, as the Shanghai composite drop around 2300, the lowest since early 2006. So are we heading to a real estate crash in China? Let’s me borrow one word from Mr. Greenspan, it’s possible, but unlikely.

Sadly as I expected (did I sound like Dai Tou Da Ge), Shangai Composite Index dropped nearly 5% in this historical opening day. It seems neither fund managers nor retail investors (Shan Hu) are listening to president Hu’s advice, which is to have a strong and balanced stock market. Maybe those people will regret it sometime later?

On a positive note, I received my federal tax refund today. Just in time for more stock bargain hunting when CitiGroup and Merril are bailing out? My wife will not like this idea

But I change my view on Chinese stocks today, after the Chinese ADRs dropped big in the US: from FXI (NYSE: FXI), to CHL (NYSE: CHL), to Sohu (Nasdaq: SOHU), all dropped around 5% or more today, less than 14 hours before the opening ceremony (which will begin Beijing time 8:08 PM, Aug.8 ). The problem is not only the expected slow down of Chinese economy, but also due to most Chinese stocks (from Shanghai, to Honghong, to NewYork) are over valued. Now they will get a reality check. Give an example, ICBC (1398.HK, 601398.SS), traded at 3 times book value, according to JRJ. That’s much higher than the US counter part such as BoA (NYSE: BAC), Wells Fargo (NYSE: WFC). Algthough we know US banks are in trouble lately because of subprime/credit crisis, ICBC can not justify its 3 times PB ratio if its growth slows down (which is possible).

So hold some cash, hold your breath, and I expect we are having a rough ride in the near future

I am not a market timer, nor do I like to predict the market trend. But I noticed another interesting article from my friend Wang Jianshuo’s blog: Stock Market Big Drop. Note Jianshuo is not into stock market, a rare type in Shanghai. In other words, when people like Jianshuo started to pay attention to the market, things are either really good or bad (noteworthy). So, the 1 million dollar question: should we go bottom fishing? My answer is be careful, because if we don’t we will catch some falling knives instead

Some ideas for bottom fishing

Buffett’s low PE stocks (source: GuruFocus): the stock holding of Buffett. The assumption here is Buffett holds good stocks. When we bottom fishing, make sure we got quality names. A related idea is Berkshire Hathaway itself , I just noticed NYSE:BRK.B is about $4,000 a piece.

China A share is more tricky, due to many reasons. But I think those listed both in Hongkong and Shanghai are worth to take a look. Traditionally A share has 30% premium over H share. One would think that’s unthinkable but it’s a reality. Now the A H price gap is closing fast. I use this table (author: oror) to compare the price. The assumption here is H share is priced rationally. This is a reasonable assumption because Hongkong stock exchange is open to the whole world (efficient market).

PS, I won’t try to catch the RIM now. I am hope it drop more (at PE of 40) before pull my trigger. I would not look into any US financial except WFC (buffett holding).

The rights of minority shareholders are also not protected as well as mature market, because in some cases the management cooked up the accounting books, and get away from it.

The flaws in market itself
Recent arrest of former vice head of China securities regulatory commission (Wang Yi): people fear this is not an isolated event, and bigger fish will be caught as this thing unravels. Insider trading was rampant and still is prevalent in China. Insider trading reduces the confidence of long term investors, people just want to make quick money and run.

There is no “short” mechanism which makes the market overshoot itself more easily. In China market one can not short a stock, one can only long a stock. In my personal view “short” is a basic strategy, and should be put into place before the “warrants” and planning rollout of “stock index future”. The regulatory is evaluating “allow trade on margin” which should pave the way for “short”.

Talking about warrants: this is another way for Shanghai Securities Exchange (SSE) and brokage houses to rip off the individual investors (more precisely speculators). In my mind one get better odds making money at a casino than playing this Chinese version of Warrants game.

Your comments?
In light of the reasons above, the valuation of Chinese stock should be discounted, compared to peers to the US.

(source: finance.cn.yahoo.com; full size picture here)

What’s reason behind the broad sell off? Two things: the central bank raised bank reserve rate by 1% (largest increment so far) to historical high of 17.5%; the upcoming IPO of China contruction (about RMB 40 billion). The former measure is more significant than the latter, I think. The tightening of monetary policy like that is targeted to cool down real estate development, inflation, the inflow of hot money,…all this make people nervous. Some even think China economy will crash amid the slow down of exports to US.

I am not economist, and nor do I like to predict the future of market trend. But the broad sell off did make more A shares (especially Chinese bank stocks) more in line with the H shares (see this A H stock price comparison).

Interview part 1:

财富人生：东方港湾资产管理 但斌_上(Use this link if embed player does not work)

Interview part 2:

财富人生：东方港湾资产管理 但斌_下
I will talk more about fund management, the fees and the value they create later on.

Interestingly, as of Friday May 23, the PE (price earning, ttm) ratio of those three are also in this order: 44 for Shuanghui (000895.SZ), 22 for Yurun (1068.HK), and 13.4 for Zhongpin (HOGS, Yahoo Finance). Assume the companies has similar profit margin and financial leverage, the different PEs shows how different market values the similar business (pork/food) in mainland, Hongkong and the US.

Background
The food industry in China is competitive, as it has been in the US. It appears there are more and more consolidations in the pork producers. Recently the producers all got it by the high cost of feed (the grain price hike) and other raw materials.

For comparison, I think of US counterparts, Pilgrim Pride (NYSE:PPC), Tyson Food, Sanderson Farms (Nasdaq:SAFM), which produce mainly chicken and beef.

There are some arguments say that Chinese are eating more meat these days: another reason caused the global food shortage because it takes more grain to produce meat (and the protein). I have not confirmed it one way or the other yet.

On the other hand, the pork price has been risen quite a bit last year in China, although the goverment had tried to control the price. I think ultimately most cost increase will be passed to consumers, as people got to eat (meat). That’s one beauty of the food stocks, because people all over the world need to eat, be it economy recession or boom.

Why ICBC
ICBC, Industrial and Commercial Bank of China, 中国工商银行 or 工行 (Chinese like abbreviation too). I am using Buffett’s rules of thumb to analyze ICBC. The rules are: business is understandble, business has a moat, sound management and attractive price.

Business: Chinese banks essentiall do similar things as foreign banks. They borrow at lower rate and lend at a higher rate; they act as broker for financial products (intermedietary service). The main difference (compared to western banks) is Chinese banks derives more revenue/profit from lending. The intermedietary business is growing fast though.

Moat (refer to our advantages at ICBC web): ICBC is the largest bank in China, as of Dec 31 2007, it has 16,588 physical branches, 23,420 ATMs.

Management: decent.

Price: it earned 0.24 Yuan in year 2007 (33% increase over 0.18 Yuan in 2006) per share, and planned to pay 0.13 Yuan dividend. The stock closed at 6.14 Yuan as of May 9, 2008, with a PE of 26. A fair price. Interestingly, I read China Social Security Fund sold some H shares on May 5 (Chinese article). Note China SSF paid a little over 1.00 Yuan for the stock, just like some foreign strategic investors (Goldman Sachs, American Express) paid in April 2006 (ICBC debut in Hongkong stock exchange in Nov 2006).

How
ICBC is dualy listed in Hongkong (1398.HK H share) and Shanghai (601398 A share). One can open an E-Trade global account to buy Hongkong stocks. For stocks listed in Shanghai, foreigners need to go through a QFII broker such as Morgan Stanely.

Appendix:
I have written about how to benfit from the booming Chinese economy and appreciation of the Yuan; and I recommended the index funds FXI, PGJ, CAF and largest life insurer and investment company China Life (NYSE:LFC). I still like the index funds, but not the LFC. Because the index fund is made up of blue chip Chinese companies (listed overseas) such as China Mobile, PetroChina etc., while LFC mainly invest in Chinese A share, which is over valued in general.

To a lessor extent, almost everyone can try the following international play: big US/international companies derives increasing revenue from China.

Fast food
Yum Brand (NYSE:YUM): its KFC, Pizza Hut stores are wildly popular especially in south China. YUM already derives more profit from China than from the US. You probablly already know McDonald (NYSE:MCD) has 800 stores in China. For comparison MCD has 15,000 stores in US.

Soft drink
As I told my American friend, 10, 20 years ago one can not get those products in rural part of China, nowadays they are even in convenience stores in those areas. I am talking about Coca Cola (NYSE:KO), and Pepsi (NYSE:PEP), not the Pepsi soft drink, but Frito Lay patato chips.

Household
Johnson&Johnson (NYSE:JNJ), P&G (NYSE:PG), Colgate (NYSE:CL).

(The thumbnail above is clickable, for faster download, click here for a full size picture)

(Original) The Chinese goverment (regulatories) has listened, and now they are pulling the trigger. Here are the two new policies:

On April 20 Sunday evening, they unveil the new lockup share transaction rules. Basically they are saying any large block of shares (larger than 1% of overall shares) has to go through a special trading platform, to avoid the large supply of unlocked shares. Reasonable move. But I heard people already abused the system. Guess what? They sell 0.99% instead of 1% (Chinese news from Sina). This is one thing I don’t like some of my countrymen: they cut corners and bend the rules. One reason Chinese have not made good quality cars like the Japanese do?

Rule number 2, the widely antipated “lowering stamp tax” (or trading tax) will take effect from April 24. The current trading tax was raised last year May 30 (also in the mid night), and there was a huge outcry about the timing of the raising tax. People disliked the “non-transparency” of those sort of the things. Appearently goverment listened again, they announced this good news after the market close (not the midnight) on April 23.

You can read more details from CCTV (there is also a video), Forbes (lockup shares) and Bloomberg (trading tax).

My take on those policies

The Chinese market dropped a lot recently because of the market was way over-priced before the drop. The current drop is simply return the market to fair valuation. It’s a good thing for the long term health of the market itself (do I sound like a politician?). The goverment’s move should not be taken as a rescue effort like the US fed dramatic rescue of Bear Stearns on the March 22 weekend, in which case the US financial system/institutions were at risk.

That being said, China does have its own problem, the most serious being the float of unlocked shares. The companies got those shares at dirt cheap price, and will do anything to lock in the profit. The goverment policies were aimed to restore the investor confidence, but the fundamental problem I mentioned above IS NOT solved…