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Investing in China: I

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I have talked about investing in China many times in this blog. Recently a good friend of my wife asked this question: how to protect her parents retirement (life style) now that they are near retirement?

I think this is a very good question, also a very common one. Recently I read Charlie Munger’s book Poor Charile’s Almanac, and he said three stocks are enought (diversified) if they are good stocks and the person trully understands it. I agree.

So, let me apply this three stocks approach and run a hypertheoritical portfolio for my wife’s friend (‘s parents 🙂

The first stock comes to mind is 601628.SS, China Life Insurance (NYSE: LFC; HKSE: 2628.HK). I talked China Life couple times, during its Shanghai IPO (secondary offering to be precise), and “Got Yuan” post. I believe China Life is uniquely positioned to take advantage of weakened competitors (China Ping’An and AIG China subsidiary), and this down market.

China Life Insurance logo

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Some Chinese stocks look cheap

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(Jan 31) Read this piece from Shui Pi, a reknown Chinese stock columnist. Quote a paragraph here:
统计表明,2007年中国资本市场融资再融资的规模近8000亿,而印花税为2005亿,两者相加近10000亿,相当于流动市值的十分之一。这笔钱是从市场中拿走的,基本上不可再生。如果2008年的主板融资规模维持不变,那么再加预期中的创业板的融资规模和大非解禁的资金数量,增量资金的需求量就是一个天文数字。2008年的股市有那么乐观吗?He is saying, the transaction cost plus the new IPO last year totaled RMB 1 trillion, which is about 10% of the total market float.

(Original) After recent brutal selling of Chinese domestic market, it appears some “blue chip” stocks are fairly cheap. For instance, 600030, Citic Securities (CS), the No.1 broker (and No. 2 investment banker) in China, traded at around CNY 67.00, considering its 2007 earning of CNY 4.00 (up 400% from last year CNY 0.80), the PE ratio is about 17, not that far compared to Goldman Sachs (NYSE:GS), which has a PE about 10.

Citic 600030 pic

Why the stock is so cheap now, I mean compared to high flying couple months ago (last Oct.)?

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China corporate tax rate reform: winner and loser

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The following screen shot is from Capital Week Jan 5, 2008


We know from Jan 1 2008 China will have a unified corp tax rate of 25% (some tax rebate for certain industry and foreign enterprises will still apply for a while).

It appears retailer, bank, home builder, and telecom (include mobile phone) will be the big winner here as they are paying a rate of 37%, 34%, 35% and 37% in 2007, respectively. From year 2008 they will enjoy the lower rate of 25%.

On the other hand, it will have little effect for Information technology, automotive, and machinery etc. as they are enjoying lower tax rate and will enjoy it for a while.

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Holiday reading etc.

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The Chinese market closed for a week during this national holiday. The HK and US market is still open. There are lots of actions of Chinese stocks in those markets. From the blue (red) chips (such as LFC), to more speculative ones (such as EFUT). It appears to me the valuation of FXI, LFC etc are no longer attractive anymore. But at the same time we can not ignore that the new money is continuing pour into those hot stocks.

My job is not to predict the market, nor am I an expert on FXI and LFC (although I did talk about those two a while ago). I picked up Philip Fisher “common stocks and uncommon profits” instead*. Phil wrote the book more than 50 years ago, but the 15 points to find the great stock still holds: product service, R&D, profit margin, sales, management,…

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Same stock different prices

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I was thinking about buying some ICBC or BoC shares in Shanghai, but the price difference of the Shanghai and Hongkong (or ADRs in NYSE) kept me from pulling the trigger. Since one Yuan is roughly worth one HKD, why would I pay premium for the A shares if I can get H Shares (or the equivalent US ADRs) for a discount?

Unless the Yuan depreciates (relative to HKD and USD) significantly (it’s possible but unlikely), buying A shares does not make sense to me.

ICBC: 601398 (Shanghai) CNY 6.80; 1398 (Hongkong) HKD 4.80

Bank of China: 601988 (Shanghai) CNY 5.80; 3988 (Hongkong) HKD 3.80

China Life: 601628 (Shanghai) CNY 48.00; 2628 (Hongkong) HKD 30.00; LFC (NYSE) USD 57.41

Note one share of LFC (ADR in NYSE) is worth 15 shares of 2628.HK, the price of 2628.HK is the same as LFC, if we consider this units conversion and HKD/USD conversion.

The main reason for the price difference is the supply and demand: Chinese people have lots of free money (in CNY), but they can only invest inside China. The China capital market has grown significantly, but it still could not meet the demand from flood of domestic investors.

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Got Yuan?

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Yuan CNY RMB Pic

It’s the Chinese Yuan (CNY), or Ren Ming Bi (people’s money). In early march, when I was in Shanghai, one USD is worth 7.72 Yuan, now it’s about 7.56 Yuan, a loss of about 2% in about 4 months. It appears this trend is not going to stop for a while. This is scary if you happen to make money in USD, save it USD and plan to retire one day in China. Because the dollar may drop faster than the rate of saving. So how do we play this?

Besides buying Chinese real estate, or buying the A-shares in Shanghai or Shenzhen (or H-shares in HK), there are other options. The mutal funds with a focus on China, or Chinese ADRs (stocks) traded in NYSE or Nasdaq. Some of the well known names include:

FXI: the full name is iShares FTSE/Xinhua China 25 Index, you can see its holdings here: it’s basically a basket of Chinese red chips traded in HKSE, such as CNOOC (CEO), Petro China (PTR), China Mobile (CHL), China Life (LFC). Those stocks are also traded as ADRs in NYSE (you may click on the ticker above to check out each stock).

LFC: on the surface LFC is a life insurance company in China. It’s more than that. It actually is a holding company of many domestic companies. For instance, it has significant stakes of MingShen Bank (600016), and Citic Securities (600030), both of them are listed in Shanghai Securities Exchanges (SHSE).

Both FXI and LFC have done very well lately, as you may know, because of the red hot Chinese stock market. I don’t personally own them. But my friend Sun has LFC, and it has done very well for him (of course he bought it long time ago so his cost is much lower). I think those two are good options if one doesn’t want to spend much time on stocks: keep in mind if you plan to hold it for long time, you can wait for a pull back to build your position.

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LFC China Life Insurance Debut Tomorrow in Shanghai

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The party is finally here. The ticker symbol is 601628 (not available at Yahoo Finance yet), it was priced at 18.88 (lots of 8 here). And it could go to 30s (note I usually make wrong guess, so take it for what it worth…)

The ticker symbol in Hongkong is 2628.HK (from Yahoo Finance). And LFC is the ticker symbol at NYSE.

Disclosure: I don’t have any postions on this.

Follow up (08Jan07, 7:48PM Central time): it opened 37.00 Yuan, up 96% from 18.88.

china life insurance LFC

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Bubble in some China Stocks

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I am not good at predicting the top or bottom of stocks, so take it for what it worth…

First is the LFC, China Life Insurance, which went from 100 to 140 in a few days mainly due to the “back to China” IPO in Shanghai Stock Exchange. Note GSH and other China blue chip ADRs traded in NYSE also got a ride at the same time.

If you would argue blue chips are “safe”, here is the more speculative ones, FFHL, the little known Fuwei Film Holding from Shandong Province, went from 8.50 to 17 in a week. You could argue the stock was priced a bit low and I saw an article mentioned this. But this quick run-up of stock price reminds me of EFUT, another little known Chinese IT company.

I have neither of the above stocks. But today’s HMIN (home inns) 8% run-up after yesterday’s 6% up made me nervous: I did have positions in HMIN. I still believe this is a very good company but I decided to take some money off the table this morning. Just as you would expected (and this is one of Major’s rules): stock went up after I sold it @ 36.88, it passed 38 today.  

(29Dec06)PS, on second thought, I jumped into conclusion too fast on FFHL. I think it’s a better company than EFUT. Please read the article I mentioned and its S1 for more info.

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LFC Shanghai IPO

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It’s priced at RMB 18.88 per share, and it will go out of gate on Jan 9, 2007 in Shanghai.

Today its US ADR LFC closed at $138.42. Note each ADR represents 40 shares of A share (in Shanghai). Consider today’s USD CNY conversion rate, 1 USD = 7.825 CNY.

138.42*7.825/40 = CNY 27.08

Assume this 138 price holds, from 18.88 to 27.08, it will have 50% jump on Jan 9, 2007. And its PE ratio will be in 90s. I feel this will very much like the New York Mercantile (NMX) recent IPO, i.e., it will jump to the target price as soon as it started trading. Ordinary investors won’t have much chances to make money on this one.

Yahoo finance has an interesting aritcle on LFC (in Chinese).