“A Chinese steelmaker that stands to make windfall profits…”

Brian Tycango is pitching a few ideas for his Asian Growth Stocks newsletter — the letter often focuses on stocks that are tough for small US-only investors to buy (ie, no US listing and thinly traded on the pink sheets, or not on the pinks at all), but today he seems to be talking up some larger companies that presumably would be easier to buy … so let’s check ’em out.

Here’s how the ad opens:

“A Chinese steelmaker that stands to make windfall profits from the change in the yuan. Get in on this opportunity, and turn $2,400 into as much as $24,552

“There are more than 50 big Chinese companies whose businesses are denominated in yuan, and whose shares trade on the US stock markets. Many of these companies are going to get slaughtered by a rising yuan, but a handful will get a huge boost — and so will their share prices.

“This Chinese steelmaker is one of the companies that will get a huge boost. It’s already one of the largest steelmakers in China. They are a leading supplier of high-grade steel essential for China’s booming infrastructure including highways, bridges, airports, and high-speed railways.”

So — a huge boost? In the big picture, all else being equal (which it never is), companies should get a currency “boost” when they import materials in a falling currency and sell them in a rising currency, which would apply to many Chinese companies who use raw materials that are usually traded in dollars or other presumably falling currencies, and who have largely domestic consumers (ie, they’re not selling the finished product for that same falling currency). To help this trend, they would also have to have labor costs be fairly low as a percentage of their inputs, since labor is paid in the rising local currency (and in this case, China is also facing substantial wage inflation for many types of workers).

But if we take that big picture claim at face value, which company is Tycango tipping? We get some more clues:

“Revenues have been growing an average of 32% a year for the last 5 years. Last year alone, revenues jumped 46% to $4.6 billion; while earnings grew 22% to $182 million.

“Their net profit margins are double that of China’s steel industry. This already makes them one of the most profitable steelmakers in China.”

But don’t worry, there’s more!

“this company spends $1.92 billion a year to import iron ore…

“this company recently borrowed $850 million in US currency to buy up Chinese steel assets.”

Both of those clues, as you’ve probably already gathered, also point to the “currency boost” — costs in the depreciating dollar, and borrowed money in the dollar that they could pay back more easily as the yuan appreciates against the dollar.

Of course, they don’t address the larger issue of the hell China would be in if their currency really doubled against the dollar in short order — while they are trying to slow down their economy a little bit, and push more domestic consumption so they’re less export-driven, it’s not going to happen overnight because a collapse of the job-producing low-cost manufacturing sector would be nightmarish for China in general and, perhaps most importantly to the folks in charge, for its political stability.

But anyway, we want to know who this is, yes?

So … your intrepid Gumshoe shovels up all those clues, tosses them in the hopper of the Thinkolator, and — when the answer emerges from the ashes on the other side — is able to reveal that this must be …

China Oriental Group (listed in Hong Kong at 581, on the pink sheets at CUGCY (20:1 ADR) or CUGCF)

So no, it’s not a particularly liquid stock for US traders to invest in — the pink sheets shares do often trade, but not necessarily every day and certainly not in enough volume that you’d want to try to trade in and out with any regularity.

But the clues are an exact match, so this must be it — China Oriental did report revenues of 30.1 billion RMB and profit of 1.185 billion RMB in 2010, and those do translate out, at current exchange rates, to US$4.6 billion and $182 million, respectively. They also match up with the 46% revenue growth and 22% earnings growth numbers in the tease, though you may have noted that this means earnings are not growing as quickly as sales — that’s all about margins. Don’t know if they have margins that are substantially better than other Chinese steelmakers or not, but the margins did drop from 2009 to 2010. Sales volume by tonnes has risen considerably every year over the last several years for all of their core products.

China Oriental Group also reports a net asset value per share of RMB 2.75, which is almost exactly where the shares are trading now (about 40 cents, or a little over $8 for the 20:1 ADR), so if you look at it on a price/book value basis they’re certainly substantially cheaper than the big US steel companies, which trade at between 1.5-2X book value — though that’s probably true of almost all Chinese companies that aren’t high-tech mega-growth thrill rides.

They’re a pretty large firm, with a market cap of over $1 billion (about HK$9 billion), and they didn’t sneak into the US through a reverse merger so they probably don’t get the same kind of “accounting fear” discount that many Chinese stocks currently enjoy, but I don’t personally know how clean their books are. ArcelorMittal, the gigantic global steelmaker, is a substantial shareholder of China Oriental and a strategic partner, so that probably should lend some gravitas to the shares and should be a boon to the company. They did dramatically ramp up their borrowing last year, largely with US$ bonds (from what I can gather in a quick look it was done in two tranches, but it looks like it probably did equal something like $850 million). That’s a lot more debt than they carried before, but steel companies around the world are usually pretty heavy borrowers and their debt level certainly doesn’t stand out as remarkable (it’s a capital-intensive business).

So … that’s about all I’ve got for you. Looks reasonably solid for a Chinese steel company at first glance, I’d say it’s probably not as worrisome as the small-cap guys that do have US listings like General Steel (GSI — the worst idea I’ve ever shared with the Irregulars, back in Summer 2008) or Sutor (SUTR), but that could well be an unfair comparison. Being big helps in the steel business, which is why their relatively good size and the connection to ArcelorMittal provides some encouragement, but Chinese steel prices have been very volatile in recent years and the competition from state-controlled companies (like Baosteel) is also very strong, so I don’t have a particularly solid guess about where they’re going from here.

Like many HK-listed companies, the basic info that flows through to sites like Yahoo Finance is often off — you can get their financials directly from the company, including their latest annual report, on their English language website here.

In terms of production volume they’re probably not quite in the top ten Chinese steel companies, almost all of which are state-controlled or traded only on Mainland Chinese exchanges, but they should be close (numbers I’ve seen on this are a couple years old). The first impression from Gumshoedom is that they’re growing nicely and, with a Price/Earnings ratio in the single digits (trailing number is about 7) the price seems cheap for that growth rate, and roughly in line with other steel companies, though it’s worth noting that almost all steel companies look cheap right now on a PE basis. So if you think they’ll continue to put up growth numbers like that, or if you think they’ll be able to improve margins based on either a yuan revaluation or something else, perhaps you’ll find something of interest in China Oriental. If you do (or don’t), feel free to let us know with a comment below.

And if you’ve subscribed to Tycango’s Asian Growth Stocks newsletter, we’d love to hear what you thought — just click here to share your opinion with a quick review at Stock Gumshoe Reviews. Thanks!

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9 Comments on "“A Chinese steelmaker that stands to make windfall profits…”"

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Cajungun13
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Cajungun13
May 26, 2011 4:37 pm

GSI is a horrible buy?

Bob Downs
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Bob Downs
May 26, 2011 6:25 pm

I recently stumbled on China Railway Construction Corp and it seems to be the
same sort of company. Seems huge and super cheap(and maybe getting cheaper).

The trading volume is very low.

These kinds of companies seem very attractive but if they never attain any trading volume
even a small holder won't be able to make any money on them. Still, ….

who noze
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who noze
May 26, 2011 8:09 pm

any thoughts on qkls they have opened they opened supermarkets haymarkets dept stores galore stock keps going down

slimpickens
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slimpickens
February 13, 2012 1:33 pm

Did you get an answer on buying Dinar there seems to be a lot of buzz about it !!

ian
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ian
May 28, 2011 1:08 am

how about buying iraqi dinar from open market

bill
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bill
May 28, 2011 11:16 am

kunlun energy i still like along wiyh angang steel and conch cement in china

cajungun13
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cajungun13
May 28, 2011 1:54 pm
Can anyone tell me what the top 5 chinese stocks are? I would like to invest a couple grand in one company …. If you had to make a decision on one stock which one would it be? And if each person in this forum could post which is their favorite long term stock that they own would be beneficial to us all. Mine is kind of vanila but its GE I started buying it after the market crashed…it went down as low as $5. Not buying it right now…but if it goes under 18 i will buy more! Thanks… Read more »
Gravity Switch
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May 26, 2011 5:48 pm

In retrospect, it certainly was when I profiled it three years ago — now that its down something like 80 percent perhaps it's a more reasonable value, I can't bring myself to like them again after that whipping and what seemed to me Tom e a failure of their business plan (or at least, a failure of my investment thesis). If you look at them, do note that they're now one of the most indebted of the smallish steelmakers — 80-90 percent of their capitalization is debt these days, so the terms on that debt would be important to consider.

MGreen
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MGreen
May 29, 2011 10:49 pm

cajungirl look into 1928.hk on the HK exchange, or the parent on the NYSE LVS. GLTY

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