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

by Travis Johnson, Stock Gumshoe | September 22, 2009 9:13 am

Today we’re taking a look once again at some Peter Schiff[1] 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[2], 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[3], silver[4], 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[5]. The conglomerate has six business segments: water[6] 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[7], owns one of the largest water transmission systems in China[8], 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[9]-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[10] 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[11].

Guangdong’s interim report (first six months of 2009) is available here[12], their last annual report is here[13] (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[14] in Australia and, like most trusts here in North America, is designed to pay out large dividends[15]. 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[16], 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 euro[17]-pacific-capital/">one review of Euro Pacific Capital, you can click here to read it or add your own thoughts.

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