“Utilities in China and Australia with Good Yields” Peter Schiff

By Travis Johnson, Stock Gumshoe, September 22, 2009

Today we’re taking a look once again at some Peter Schiff picks — I’ve done this a few times before, and one of his picks that I sniffed out for you late last year is currently the top performing teaser pick in all of Gumshoedom (that was Skyworth Digital, FYI, up about 500% as I type).

Last time I wrote about his picks, he got a bit snippy (“snippy” is kind of his thing, at least according to the public speaking I’ve heard … which means he’ll fit in nicely if we wins Chris Dodd’s seat in the Senate next year) — he said that the reason they gave clues about stocks in his newsletter but didn’t reveal the names was that he is a broker, and he can’t give out these stocks without determining whether they’re right for each individual. I still think that the main reason to do these teases in the newsletter is to get more folks to call his “investment consultants” so they can hear the sales pitch and sign up for an account with his brokerage firm … but that may be splitting hairs.

Because the point is, he’s got teaser picks, and I like sniffing out teaser picks — so there you have it, symbiosis ….

This time we’re looking at some picks that don’t have the same kind of home run potential as his Chinese TV pick did way back near the bottom of the market last Winter. But still, perhaps they’ll be interesting — Schiff’s focus continues to be, as it always has been, on getting his customers out of the dollar. He continues to say that inflation is coming, it will be mammoth and horrible, and you must be in gold, silver, and dividend-paying foreign stocks if you want your portfolio to survive.

So what is he picking this time? Some utility companies. The first is a Chinese firm, operating in Hong Kong and the nearby mainland; the second is Australian.

And of course, we get plenty of clues … here’s the pitch for the first one:

“This Company is a Hong Kong-listed investment company focusing primarily on infrastructure and real estate. The conglomerate has six business segments: water distribution, property investment and development, department stores, hotel operations and management, electric power generation, and toll roads and bridges. It is one of the largest listed water-supply operators in Asia, owns one of the largest water transmission systems in China, and provides around 55% of the water supply needs in Shenzhen and Dongguan on the mainland. As an important “‘red-chip” company, it also has investment stakes in properties including a comprehensive shopping mall; office and hotel complex; four coal-fired power plants in the province; two toll roads and three toll bridges; as well as self-owned department stores and a hotel chain management business.”

So that’s one reason to love Peter Schiff — just the first paragraph, and already we’ve got enough clues to conclusively identify the stock. I have to keep you hanging for just a moment longer, though, so I can tell you why he likes this one …

It has a yield of about 3%, based on an expected dividend of about 12 HK cents this year. They’ve cut the payout ratio to 33% to preserve capital, so they’re ready to make acquisitions if prices are nice.

“… the water business would appear to be a good, long-term growth area, providing defensive earnings. This Company generates roughly 70% of its net profit from supplying water to Hong Kong, Shenzhen and Dongguan, which we believe is an excellent defensive business in an economic downturn….

“….The Company’s others assets provide additional upside earnings potential. Besides the earnings from the Company’s core water business, its real estate and infrastructure investments add further attractive potential to the overall mix….

“Disposal of non-core assets could be a potential catalyst. Non-core assets represent about 13% of the value of the Company and could provide a catalyst for the stock if market conditions improve and the Company is able to dispose of these units. Management has expressed a desire to spin-off the hotel unit. We also would not be surprised to see the Company dispose of its department store business or restructure its power generation and road development businesses.”

And they sum up:

“We believe this company is an excellent core position in a lower-risk portfolio. A good yield, which we expect to increase in the future, plus solid investments in water, infrastructure and real estate, gives this company a positive outlook.”

Hoo dat? Guangdong Investment Ltd (0270 if you buy in Hong Kong like Peter, GGDVF on the pink sheets)

I don’t know a lot about the big Hong Kong conglomerates, I generally have been trusting Marty Whitman at Third Avenue Value to run that exposure for me (I have money invested with that mutual fund, and at the moment it has close to 40% of its portfolio invested in the real estate-heavy Hong Kong firms like Cheung Kong, Hang Lung, Henderson Land, etc.). Guangdong is one of the relatively large ones that Whitman doesn’t have in his portfolio, at least not in a large position — probably because it’s not as much of a real estate play, but perhaps there are other reasons.

Guangdong does indeed get most of its money from water, with concessions for comprehensive water services in Shenzhen and Dongguan as well as a big business supplying Hong Kong with water — most of those mainland concessions run to 2030, and they just invested a lot in the Hong Kong water supply system back in 2000 or so, so I assume their concessions there run out many years as well.

They just released their interim results late last week, and they looked pretty impressive at first glance — earnings were up substantially over the first half of 2008, coming in at about 16 HK cents per share, and the interim dividend was 5 HK cents, so that does put them in line for something in the neighborhood of 12 HK cents for the year, if they also bump the final dividend up a bit (the dividend for the last 12 months now stands at 11 cents, so that’s a trailing dividend of 2.8%).

Is Guangdong going to be a great winner? I have no idea — they do already get a large portion of their income from water services, so if they chose to divest from other areas and sell their hotels or their gigantor department stores they could probably raise cash to buy other fun stuff, but most of these firms have wide holdings of disparate investments and historical ties to many of them, so one shouldn’t necessarily assume that they’re going to go through big corporate restructuring just to simplify and streamline. If you’re curious about their toll roads, power plants, and their other holdings, they provide basic information here.

Guangdong’s interim report (first six months of 2009) is available here, their last annual report is here (both are PDF files). As I type the shares are trading in Hong Kong for about HK$3.84, so a fair price on the pink sheets at the current exchange rate would be about 49.5 US cents — the last pink sheets trade I saw was 51 cents, so at least someone is willing to overpay by a little bit to buy this foreign stock, which is not unusual.

What else hath Schiff wrought?

Company 2 is our Australian utility with a much higher dividend — 14% when he wrote … here’s how he describes it:

“This company holds a sizable interest in three electricity distribution service providers in Australia: one distributes electricity to the inner suburbs of Melbourne, another distributes electricity to regional Victoria and the western suburbs of Melbourne, and a third distributes electricity throughout South Australia….

“We like this Australian utility for its earnings from stable, regulated assets as well as its attractive, cash-covered dividend yield of approximately 14%…

“Additionally, the Company earns substantial revenue from so-called ‘unregulated’ activities. While a portion of this income is driven by the mining and infrastructure boom, much of it is actually regulated expenditure, one-step removed.”

So this one they call a “good core foreign holding for investors looking for healthy yield” …

… the Thinkolator calls it Spark Infrastructure Trust (SKI on the Australian exchange, SFDPF on the pink sheets)

This is an investment trust that owns 49% of three electrical utilities in Australia and, like most trusts here in North America, is designed to pay out large dividends. The current share price is 1.15 Australian dollars, and the 2008 dividend was 18.5 cents — the distribution for the first half of 2009 was announced a few weeks ago, and it is substantially lower than the interim distribution for 2008 (this is part of their plan for preparing for resets of their regulatory agreements in 2010 and 2011 and shoring up their capital). The payout ratio had been over 90% and is now 70%. This is actually, in effect, a stapled unit with some debt and some equity component, and it looks to me like what they’re essentially doing is cutting the distribution down to the minimum debt portion of 13.56 cents.

So that’s a long winded way of saying that the shares/units/whatever you want to call them have a current yield of 11.7% based on that 1.15 share price. The pink sheets shares last traded at $1.015, which is a very slight premium to the closing price in Australia.

This is yet another foreign pink sheet stock that actively does not market itself to US investors or have an ADR, probably because they don’t want to deal with US regulators — and because, as a trust set up for Australian tax laws, it’s probably not ideally designed for US investors. I don’t know what the tax implications are, but the standard advice is that if you’re hoping to offset any withholding tax paid on foreign shares (I don’t know if you’ll pay such a tax for either of these stocks), don’t put them in an IRA … and if you’re buying on the pink sheets, don’t use money that you might want to get out in a hurry, it can often be tougher to sell these shares at a fair price than to buy them.

That last goes for any foreign pink sheets, but more particularly for those that are not ADRs (either sponsored by the company, or unsponsored ones put together by a broker to meet demand) — just FYI: If the pink sheet symbol ends in a Y, it’s usually an ADR; if it ends in an F, it’s usually just the common shares traded on their home exchange, and the broker uses the symbol to identify them after they go overseas and buy the shares for you. That’s a simplification, but it’s a useful distinction to remember. Having an ADR generally means that you can get somewhat more information about the company from the SEC, though it’s always best to go to the company directly to see all their filings, and it also usually means that there’s likely to be more trading volume in the shares.

That is, in the end, what Peter Schiff and the other brokerages who focus on global stocks try to do to justify their commissions — they buy for you on the home exchange, in the local currency, and therefore get much more liquidity for their transactions and better pricing. If you’re a tiny investor and don’t trade in and out very often, the bid/ask spread might not matter as much and pink sheet shares might work fine for you, but this is certainly not a realm for the active trader, and large buys and sells might make a brokerage account that gives direct access to other markets worthwhile. That doesn’t mean you necessarily need Euro Pacific Capital, of course, I know many of my readers use the foreign trading capabilities of E*trade and several of you have suggested Interactive Brokers in the past as well, and I’m sure there are many others (this is not an endorsement of anyone, just a note that investors are not limited to any one broker, Schiff or anyone else, for direct access to foreign markets)

Incidentally, if you want a bonus third idea, those three utilities that Spark Infrastructure holds a piece of are technically controlled (51% ownership, though management is 50/50) by Cheung Kong Infrastructure, another Hong Kong conglomerate that focuses on global infrastructure (Cheung Kong Infrastructure Holdings trades at 1038 in Hong Kong, CKISF on the pink sheets, with a decent dividend also, by the way).

So what do you think? Do you like trading internationally? If so, what brokers do you use? What do you think of these ideas from Schiff — want to own some Chinese water and some Australian electrical utilities? Let us know what you think with a comment below.

And there are not many reviews of brokerages on the Stock Gumshoe Reviews site, but I’m happy to post them if you want to submit ’em, especially folks like Schiff who make their name with market calls and stock picking — we do have one review of Euro Pacific Capital, you can click here to read it or add your own thoughts.


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28 Comments on "“Utilities in China and Australia with Good Yields” Peter Schiff"

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Ed
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Ed
September 22, 2009 9:49 am

Good article as always. Slight correction ticker is GGDVF for Guangdong Investment

SageNot
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SageNot
September 22, 2009 10:51 am

I hope he makes you folks some $$, he’s DEAD WRONG about the US dollar, & completely avoiding the US markets since the bottom, how much damage has that idiot strategy cost him & his clients?

Not JMHO either, he really wants Dodd’s Senate seat, just what our country needs, one BS’er after another, God help us!

Gimli
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Gimli
September 22, 2009 10:53 am
Excellent Article! I just joined and every article I’ve read exposes, explains and educates about “stock teasers, newsletters & so called experts!” I am starting investing very late and have to make a lot of good investments with a larger portion in higher risk small cap and penny stocks than I would like. I also believe that diversifying out of the US Dollar for the next decade is wise. I will check out the companies you listed but unfortunately while I can trade internationally by using Firstrade’s broker desk, I don’t have a large enough account to make the trades… Read more »
cflake
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September 22, 2009 10:55 am

For those interested in Chinese utilities, Hong Kong Gas (HOKCY), which provides water and gas to Hong Kong, looks like a better prospect to me than GGDVF. It has been rising steadily for the past six months, and it puts up good numbers — profit margin, return on equity, etc. Plus it is traded in good volume, so you can buy it on the pink sheets without having to have an international broker. By the way, this is NOT a recommendation, just info.

Oliver R
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Oliver R
September 22, 2009 11:03 am

I have traded pink sheet “F” shares many times and currently own Western Wind (WNDEF), Strathmore Minerals (STHJF), and Uranium One (SXRZF). My question to Travis is…do the F shares payout dividends or do only the local shares? Thanks in advance.

spreadtrader
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spreadtrader
September 22, 2009 11:05 am

Are you sure the Australian utility isn’t Envestra, Ltd. (ENV-AU)? I’m asking because I don’t know. It yields 14%, I’m not sure that this SKI-AU does. I have the yield for that stock at 5.6%.

Vince
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Vince
September 22, 2009 11:28 am

Hey Gummy,

Enjoyed todays article very much. As always you are right on target.

On another note, can stocks on the Hong Kong mkt be purchased thru a broker like Vanguard?? I’d like to purchase the Wynn Macau IPO on Oct 9th but don’t have a clue how to go about it. Can you assist??

thanks–Vince

Jan
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Jan
September 22, 2009 11:40 am
Of course Peter Schiff is trolling for customers for Euro Pacific Capital and yes he is insufferable. He was correct in his outlook in predicting the unraveling of the U.S. markets a year ago but incorrect in thinking that it would only minimally affect the global economy…esp. emerging Asian markets that are industrializing. All of my stocks invested in Europacific went down considerably and dividends all but disappeared. Only one has recovered. The fact that most of the stocks he was touting prior to the crash are still in desperate shape does not prevent him from crowing that he predicted… Read more »
Thomas Toedtman
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Thomas Toedtman
September 22, 2009 12:38 pm

Chas Schwab tells me they transfer “f” pink sheet symbols to trade in home exchanges. I costs a small bit more because of the additional broker transaction. The important thing is to confirm the bid/ask prices of an “F” issue when placing limit orders. I have gotten reliable pricing even with market orders from them as well.
Point is, the added broker/ middleman is not gouging the spread in my experience w/them, and you are not out in the cold when selling an issue.
This may not be the case with other US trading houses.

Kushmir Intuchis
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Kushmir Intuchis
September 22, 2009 1:50 pm

Regarding GGDVF — my only question regarding the detective work here is whether Peter Schiff would pick a penny stock — $0.51 on the pink sheets? Is it common for him to trade in penny stocks?

Bob
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Bob
September 22, 2009 2:26 pm
I think it’s premature to say that Peter Schiff is DEAD WRONG about the dollar. That would be like saying Peter Schiff is DEAD WRONG about the housing bubble — in the spring of 2007. This year’s federal deficit is $1.8 trillion. We have a President who has promised us trillion dollar deficits for years to come. And despite the recession we still have a whopping trade deficit. The only way out will be for the government to print its way out of its debts. That doesn’t mean that other countries will be safe havens though, because they all engage… Read more »
Maryanne
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Maryanne
September 22, 2009 5:50 pm

Great article about international investing. Interactive Brokers has very good trading software (Traders Workstation) and LOW commissions (around 1 usd, eur, or cad) and CHEAP margin. Have brought stocks and options in Canada, Italy, Switzerland. With that, no excuse for using pink sheets or paying $10 or more to Etrade & Schwab.

Maryanne
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Maryanne
September 22, 2009 5:53 pm

also have to give Peter Schiff credit for getting me interested in foreign investing (thru his book and initial conversation with his brokerage) Good thing I found out about Interactive Brokers as I manage my own investments (these global trades up 5% in 1 month and 10% dividends) and therefore seek lowest costs.

worthalotmore
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worthalotmore
September 22, 2009 6:02 pm

Here in Australia, and looking at the SKI and ENV weekly + daily charts, just with MAs and volume indicators–ENV looks the most likely to break out(up, that is)–and its cheaper–54 cents against SKI at $1.55 (Aussie money)at close yesterday.
Have asked my broker for info about these two–the dividends seem high, but thats not to say its not correct.
First ever post in 18 months–great enterainment and info site-luv it–the only one of a very few which has survived my regular “remove me from your list “purges..

worthalotmore
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worthalotmore
September 22, 2009 6:51 pm

Further info re SKI etc–
from broker web site -ENV 11.92% yield SKI 13.89% yield.
ENV is a nat gas distributor SKI distributes power (elect) .To my very untrained eye SKI has a slightly better looking assets/liabilities ratio and may not be as volatile, so maybe the better long term (chart is not as exciting–but still looks to have plenty upside available) ENV MIGHT reward the nimble traders earlier-SKI for the longer term profits –IMHO only
happy trading (sorry–investing..)

worthalotmore
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worthalotmore
September 22, 2009 7:52 pm

Sorry people–that SKI price should read–close last night at $1.155 (Aust $)–not 1.55—finger trouble…
(if you want to buy mine at 1.55 though, you can have some!!!)
happy trades

Billy Basu
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September 22, 2009 8:37 pm

Given that you highlighted a Hong Kong stock and I am based in Hong Kong,I thought I would bring your attention to a couple of potentially more rewarding Hong Kong listed stocks that I own,Alco Holdings and Chaoda Modern.Both analyses are written in my blog 28th August and 21st September.By the way,I have praised your website as excellent on my blog dated 7th January 2009 – yep you have to scroll down to find them!

spreadtrader
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spreadtrader
September 22, 2009 9:15 pm

What’s the Hong Kong exchange symbol for Alco Holdings? I’d like to look at a chart.

I found Chaoda Modern (682-HK). It’s a farming operation, selling crops and livestock. Why is it compelling? The chart has to break above 5.50 to go anywhere. Sell it if it hits 4.35.

Please tell us about Xiwang Sugar Holdings Company Ltd (2088-HK). I like the concept (manufacturing of corn based biochemical products). It looks like it is turning around and I’m bird dogging it because of the fat 8% yield.

Carl
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Carl
September 23, 2009 1:08 am

Alco Holdings is 0328-HK

David Oshry
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David Oshry
September 23, 2009 3:29 am
One way to buy stocks on the Hong Kong exchange would be to open an account with HSBC local bank here. I believe it is really easy for foreigners, although it would require a business trip/vacation out to Hong Kong for a few days. You need 2 or 3 forms of ID and proof of residence(in your home country). If you have everything you need the account opening takes about 30min. I opened an account at Citibank in Hong Kong in 2004 when I was there on a tourist visa, although I believe they are not as helpful to US… Read more »
Billy Basu
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Billy Basu
September 23, 2009 8:28 am

If you see my website http://www.globalstockinvestingtoday.com,
it provides the analyses of Chaoda Modern and Alco Holdings.

Alpha
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Alpha
September 25, 2009 9:40 am

think ur second guess is wrong, should be due.ax, with 14% yield. this is not the first time he recommended this stock.

thealbatross
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thealbatross
September 26, 2009 11:31 pm
Just a potential “trip hazard” about investing in Electricity Distribution Companies. In February, 2009, the Victorian Black Saturday Fires raged through Victoria, claiming the lives of 173 prople + injuring many more. Just after the fires, it was claimed that fallen power lines most likely caused of some of the most serious fires from sparks. A class action was launched against the power suppliers. I have not followed up on the current situation – but – as the entire Australian Eastern Seaboard has forecasts for a more severe weather conditions this coming fire-season, there may be a significant risk for… Read more »
Gravity Switch
Admin
11
September 22, 2009 9:57 am

Oops — thanks! Fixed.

Gravity Switch
Admin
11
September 22, 2009 2:15 pm
I’m not sure what Schiff’s criteria are, but if he wanted to restrict himself to stocks that have higher per-share prices he’d be losing a large part of his universe. Don’t assume that our criteria for “penny stocks” are common on foreign exchanges, where prices are often dramatically lower, in nominal terms, than we see for typical mainstream stocks in the U.S. Guangdong does trade for less than HK$4 per share, but their market cap is about US$3 billion — a “mid cap” company by most US standards, or a really big “small cap”. You can still call it a… Read more »
slam608
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slam608
September 23, 2009 12:23 pm

Schiff is a small govt Libertarian not a crypto-marxist (but stuffing his own pockets and helping to cause housing bubble …can you say Anglo Mozello’s BFF?) like Dodd.

Gravity Switch
Admin
11
September 25, 2009 10:56 am

He has recommended Duet Group before, but it’s not an electrical utility (or at least, not primarily) — they mostly do gas transmission and pipelines, it doesn’t really match any of the other clues as far as I can tell.

This is where I wrote about his earlier recommendation of Duet:

http://www.stockgumshoe.com/2009/02/one-of-peter-schiffs-top-picks-for-2009.html

Marianne Toedtman
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October 14, 2009 3:36 am

Sounds like you got the right information.

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