ICBC: benifit from Chinese economy?

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Last week, an American friends asked me about the booming Chinese eocnomy and how to benifit from it. There are many Chinese ADRs in listed in the US market these days, but I don’t think they are suitable for most individual investors (they are for the bolder speculators only 🙂

ICBC deposite book

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).

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.

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.

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

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