Peter Schiff’s China Infrastructure Stocks — Part 1, Construction and Agriculture

By Travis Johnson, Stock Gumshoe, April 22, 2010

The folks at Euro Pacific Capital, led by senatorial candidate Peter Schiff, are looking for clients for their international-focused brokerage house, which generally solicits US clients for building accounts focused on dividend-paying foreign stocks and precious metals, in keeping with Schiff’s basic strategies (which as far as I can tell is, in brief: dollar will collapse, fiat currencies doomed, export-led countries and commodity producers will dominate).

And every now and then they release a newsletter or special report that highlights a few of their favorite stocks — but just like our more traditional newsletter dudes, they know the best way to get a response is to withhold the actual details until the potential customer or client calls (or subscribes). In Schiff’s case he doesn’t want to sell you a subscription, he wants you to park your money with one of his brokers and generate some nice commissions as you buy into the stocks that he likes on foreign exchanges.

So if you don’t feel like signing up with Euro Pacific, or even chatting with one of their hungry brokers on the phone, how about we try to figger out just which stocks he’s teasing today? That is, after all, the Gumshoe way.

The basic thesis of his special report on Investing in China’s Infrastructure is that China will rise because of their high personal savings rate, high foreign reserves and low government debt, healthy banks, access to relatively low commodity prices (compared to the height of the commodity bubble), and, more than anything else, a huge government focus on stimulating the economy through building power generation, the electrical grid, roads and railways, and water conservancy and treatment projects.

And then, of course, we get some stock ideas … or at least, the ideas behind some stock ideas, without the actual stocks being named.

“We’ve identified four companies we think are in a position to ben- efit from the road map provided by China’s stated infrastructure goals. Top notch infrastructure companies to begin with, they offer a sound way to take advantage of the increased government subsidies …”

And what are those companies, you ask? Well, let’s start digging into the clues:

“Company #1 provides transportation infrastructure construction services in China. The company also engages in consulting, design, manufacturing, and development. The construction segment engineers and builds transportation projects and also constructs buildings and integral underlying support systems.

“Company #1 has benefited greatly from the increased investment in infrastructure in China, expanding its business and increasing its earnings significantly in the first half of 2008. Its five-pronged strategy is to strengthen its position in infrastructure construction by pursuing ambitious projects and producing high-margin products, expanding further into property development, exploring overseas growth prospects, and further improving its cost structure and operational efficiency.”

Well, they don’t exactly go out of their way to give a lot of specific clues in there, do they? Fortunately, they do also include a stock chart (though it conveniently neglects to have a price scale to it) … so who could this be?

Going off of the generic teaser for this construction firm, I narrowed it down — and then got an exact match on the shape of the chart, so I can tell you that this mus be: China Railway Group (ticker is 390 in Hong Kong, CRWOY or CRWOF on the pink sheets). CRWOY is the ADR, listed at 25:1, which means that each ADR represents 25 shares in Hong Kong — the shares trade right around HK$5.50, so 25 of those would be HK$137.50, which at the current exchange rate is about $17.70. CRWOF is a regular 1:1 pink sheet listing, so the fair price ought be be around 70 cents, but neither of these trades very much outside of Hong Kong.

Schiff teased out the sister company to this one, the other giant Chinese railway and infrastructure firm, last April in a similar newsletter — that one is China Railway Construction, it’s now at a fairly similar price to when I wrote about it in April of 2009, both of these stocks have followed a similar pattern over the last year, shooting up into August as the economy recovered, and moving down pretty steadily for the eight months following. These are massive, state-controlled companies (China Railway Group is 58% controlled by the Chinese govt.) that do a lion’s share of the big construction projects, including the big railroad expansions, and also work overseas (China Railway Group just got a huge Indonesian coal transport contract last month, for example, and they’ve been accused of labor violations regarding their workers on some big projects in Africa).

I’ll try to get to the rest of these stock ideas, so I won’t get too into the details of each one — you can dig in yourself if you like, Bloomberg says the PE ratio is about 40 or so, and this is about a $17 billion company (market cap). They have not ever paid a dividend (which makes them stand out as a bit different from most of the Schiff picks I’ve covered), but income has been growing.

Next?

“Company #2 helps to increase the scale and efficiency of Chinese agriculture by aggregating family farms into collectives – thereby increasing standardization and eliminating multiple layers of middlemen. Generally, the terms of the acquisitions require the company to offer upfront payments and employment contracts to farmers. This company helps improve profitability through investments in agricultural equipment, fertilizers, and pesticides. Farmers benefit through better pay and access to credit.

“We think this company has a promising future because of its unique business model, growth potential, and government support. Further, the financial statements have improved significantly in the last year and valuation is still attractive despite recent strength.”

Again, not a huge number of specific clues in there — but they did show a little chart of this stock’s movement over the past year, so I can confirm that they’re teasing:

Chaoda Modern Agriculture (ticker 0682 in Hong Kong, 1:1 pink sheets symbol CMGHF, 50:1 ADR on the pink sheets at CMGHY, both pink sheets listings trade in light volume).

I wrote about this one roughly a month ago for the Irregulars, following a Bryan Tycango teaser for the same stock — so not to repeat myself, I’ll just share an excerpt from that commentary here, I haven’t looked at the stock since then:

“Chaoda Modern is a producer of non-commodity foods — ie, they don’t grow grain, they grow vegetables, fruit and tea (about three quarters of their land is used for vegetables, so that’s the main focus) on the thousands of acres of farmland they’ve been acquiring for years, and they process that produce for local consumers and for export. And they have been consistently growing their farmland holdings, as of the filing last summer they did have roughly 95,000 acres (they report in hectares and claimed 38,565 hectares, which is about 95,200 acres) — though as of their most recent release for the period ending December 31, 2009, that number has risen again, to over 100,000 acres.

“Likewise, the cash position has increased and now stands at about $440 million (RMB 3 billion) — at the current exchange rate it was about $250 million before this latest filing, so that’s again close enough. If you’d like to check my numbers or delve into their filings more deeply, most of them are conveniently available here in English.

“My impressions? I’m pretty, well, impressed — their margins are a lot higher than I would have guessed for a vegetable farmer, with gross margin of 64% and pretty low expenses, it certainly seems like they’re making things work. They have been getting consistent yields from their vegetable farms, and though the prices are not constant they have generally been able to also consistently increase their revenues and profits thanks to the additional acreage they bring on each year and to incremental efficiencies. The last reporting periods have apparently shown a bit of weakness in produce demand thanks to the financial crisis, but the numbers still look decent.

“Earnings growth for the last six months of 2009 was about 20% over the comparable period of 2008, and the diluted earnings were RMB .44 per share — overall profit was down substantially from the prior period, but diluted earnings per share was still up (basic earnings were RMB .75 in the second half of 2008, but diluted earnings were RMB .39). If you look at the last two six months periods, calendar year 2009 (they’re on a summer fiscal year), the trailing earnings are RMB 1.10 per share.

“Then we have to do more currency translation, because it trades in HK$ and the Yuan Renmimbi and the Hong Kong dollar have diverged a bit in recent years … so those earnings translate to HK$1.25, which means at the last trade in Hong Kong of HK$8.52, the shares were selling at a PE ratio of just under 7.”

The shares closed at HK$9.17 overnight, just FYI. I don’t think they’ve released any news since then, but haven’t checked closely.

There are two more ideas teased by Schiff, another Chinese construction firm and a Chinese electrical equipment (transformers and turbines) company, but it will take me a bit more to dig into those — I’ll get into them as soon as I’m able (or, of course, if you want to take a shot at them you’re more than welcome to share your sleuthing in the comments below — here are the preliminary clues for you if you want to get started and don’t feel like turning over your contact info to Schiff to get a copy of his “special report” with the full teasers in it:

“Company #3 designs, manufactures and sells electricity transformers to independent power producers in China. In 2006, the company leveraged its technology to produce transformers for the wind power market. In addition to its core business, this company has recently secured its first large wind turbine customer and is in testing with another potential customer that could provide meaningful growth in the next several years.

“This company is run conservatively with minimal debt and positive free cash flow. Although it possesses a growth profile, the company also pays a dividend. despite strong performance in 2009, we feel the company remains attractively valued.”

So that’s #3, feel free to register your thoughts below. Number four:

“As an industry leader in the manufacturing of the customized machinery that facilitates elevated road and railway construction, Company #4 offers a unique approach to investing in China infrastructure.

“It provides bespoke solutions for major construction projects such as bridges and highways, including carriers for moving heavy loads, marine hoists, and other infrastructure construction and inspection equipment. One of its most innovative solutions is a concrete pre-fabrication technique that greatly reduces the amount of time it takes to build elevated road beds and bridges.

“From 2008 to 2009, the company saw a year-over- year revenue growth of more than 23%.”

Haven’t even started to look at those, I’m afraid, but I’m all ears!

And of course, it should be noted that Schiff is far more careful and sober than the typical newsletter hypesters — he does have a greater responsibility to his customers since he acts as a broker, not just a commentator and member of the press (as newsletters are generally considered), so he has careful notes about the risks of all of these stocks, and reiterates several times that they might not be right for you and that you should speak with a broker (at Euro Pacific Capital, naturally) before investing. I have no idea whether or not those brokers will do a good job at matching you with investments — my understanding is that brokers don’t generally (pending reform changes) have the same fiduciary responsibility as investment advisers, though of course they do work with individuals so they have some responsibility for serving individual needs, (unlike newsletter editors, reporters, commentators, and folks like me who just broadcast our opinions widely, with no regard for what’s a good match for your personal situation).

So there you have it — If you folks don’t figure out 3 and 4 on your own and share some thoughts about those below, I’ll do my best to get on those soon. And please, feel free to share any other thoughts you have as well — that’s why we have such a friendly little comment box below.

P.S. Peter Schiff doesn’t really have the same business model as newsletters, of course, but we have received several reviews of Euro Pacific Capital, you can see those here.

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17 Comments on "Peter Schiff’s China Infrastructure Stocks — Part 1, Construction and Agriculture"

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darin
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April 22, 2010 3:24 pm

It would certainly make sense that these would be great investments! the Chinese food and infrastructure markets have no where to go but up over time.http://www.ogdenvalleyrealty.com

MJM
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MJM
April 22, 2010 3:28 pm

Stock #3 is Likely Jinpan (JST).

Billy Basu
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April 22, 2010 11:25 pm
I own Chaoda Modern Agriculture in Hong Kong and wrote about the reasons on my blogs dated 21st September 2009 and 14th October 2009 onhttp://www.globalstockinvestingtoday.com (you have to scroll down the blog page) when I bought the stock at the equivalent of HK$5.29 overall. It was super cheap then as explained – I would not say that it is outrageously cheap now since you would have to discount the stock for less than perfect track record on corporate governance and major connected transactions by the CEO in supply the fertilisers to the company(if he brought his fertiliser company into the… Read more »
John Cordwell
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John Cordwell
April 23, 2010 6:24 am

Dear Mr. Basu,

I work in Europe (not in finance), buy ADR's (by computer) at the NYSE, is there a relatively easy method to buy shares on the Hong Kong stock exchange?
Can one buy them through a retail bank for instance, or is it a bit more complicated, such as having a HKdollar account in Hong Kong etc.
As you have gathered, I am fairly new to investing and sometimes I come across a "good" investment from the HK stock exchange. I just wondered how easy it was for a normal guy to invest there.

Thanks for your reply.
John Cordwell

Ron
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Ron
April 23, 2010 8:22 am

Take a look at E*Trade. The have a Global Trading platform, that includes Hong Kong. Though based in the USA they also have an International service I believe. Do not know what minimum account sizes they require on International accounts.

Aaron Smith
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April 23, 2010 3:53 pm
It is important to note that Schiff's company actually makes trades for these foreign stocks on the foreign exchange itself, no ADR or pink sheets. I know that there are times where you can overpay for a foreign stock on the pink sheets, or perhaps the ADR doesn't track the actual stock just right (I think I'm correct in saying that…). So, part of the perk EuroPac offers is the ability to buy and sell on the local exchange. As well, in order to benefit from Schiff's philosophy of other currencies rising against the dollar, the dividends are paid out… Read more »
Aaron Smith
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April 23, 2010 3:59 pm

Oh, and I appreciate you finding these companies Stock Gumshoe, as I am not a EuroPac investor and prefer to do things on my own. Great job.

Gucumatz
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Gucumatz
April 23, 2010 5:46 pm

John Cordwell, you can buy those Chinese stocks (both China Railway, Jinpan, Chaoda) at very low cost on German exchanges (e.g. Xetra or Frankfurt) if you have online banking/investing account. However, trading volumes are usually very small.

Gravity Switch
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April 23, 2010 8:53 pm
True enough, and I find some of his arguments compelling, too, though he certainly has trouble with shorter term stuff that goes against his thesis (not that he's the only one). Do note that Euro Pacific is a "traditional" broker, and for "traditional" you can substitute "expensive", I think they generally work on commissions of 2-3% for stock buys, though I may be off on those numbers. To their credit, they claim not to encourage churning with those huge commissions, but it is pricey compared to self-directed online accounts, particularly as most of the big brokers now let you more… Read more »
Richmond
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Richmond
April 23, 2010 9:08 pm

You can trade Asian stocks,including HK, through Boom Securities,Hong Kong..google them. Cheap commissions.

Inez Deborah  Altar
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Inez Deborah Altar
May 5, 2010 10:31 pm

Who undermines the commune (or even the relatives´peasant holding) undermines the structural and economic stability of China from which they hope to profit

ctripper
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ctripper
May 9, 2010 6:12 am
Generally I like Schiff's ideas but no comments on his actual returns or strategy China railway group – From google –http://www.google.com/finance?q=HKG%3A0390 Some impressive figures – Y-on-Y Revenue growth (48%) PE of 13 (based on 1st quarter 2010 figures) dividends 6 cents RMB (date to be announced) Risk ?? If you believe the china bear Jim Chanos and China red-flaggers like Victor Shih/Micheal Pettis or even China economist like Yu Yongding. The non-official China government debt is closer to 70-80% of the GDP and their banks are stuck with some level of bad debts due to the stimulus. (read local gov… Read more »
Orlando   Whyte
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May 28, 2010 4:35 pm
JOB VACANCY CAPITAL OIL & GAS INDUSTRIES INTERNATIONAL LIMITED SOUTH LONDON Seeking for qualified Engineers. Applicant must possess the following: 1) University Degree in any of the following courses; Civil, Mechanical, Electrical, Chemical Engineering, Geology, Industrial Physics. Or any equivalent courses in oil & gas 2) 5years working experience with oil and gas company 3) Ready to work with a group/ team 4) Single/ married but not be above 35years of age 5) Speaks English and Chinese or Dutch or portuguese 6) Willing to traveled outside his/her country Kindly forward your CV and application letter to Dr. Orlando Whyte through… Read more »
KSA
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KSA
June 17, 2010 5:17 pm

I think #4 is Wowjoint Holdings, BWOW.

tom
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tom
April 28, 2010 6:08 am

euro pacific brokers take 3 % of your portfolio value and you have little to no say in what they invest in.

Leonardo Pisano
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Leonardo Pisano
April 29, 2010 9:06 pm

I am pretty convinced it's A-Power (APWR)

BigEd
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BigEd
May 9, 2010 8:03 pm

I own APWR but don't think it pays a dividend. It states that # 3 pays a dividend.

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