Today I’ve gotten several copies of an ad that is strongly reminiscent of one that I looked at in May of 2008. This is for the relatively new Without Borders service from Casey Research, an international and emerging markets-focused newsletter that will run you about $180 at the current “sale” price.
Here’s how the tease begins:
“There’s a small provincial cement manufacturer located in Shaanxi province, in central China.
“For three years in a row – 2006, 2007, and 2008 – Forbes China has listed this company in its “100 Top Chinese Companies with Growing Potential.”
“Thanks to the downturn, this company is incredibly undervalued. Its share price has just bounced off its 52-week low…
“… and it’s trading with a miniscule PE ratio right around 2.3… serious bargain basement pricing for a stock that’s about to be flooded with cash in the next two years.”
The big underlying argument is that China’s stimulus program is going to be pushing money into infrastructure, and specifically into roads, bridges, and more rebuilding in the areas impacted by last year’s earthquake.
“You could easily be looking at a real return of almost 300% over the coming months.”
Sound familiar yet? We get one more big block of clues to clarify:
“Domiciled in Jersey, England, this cement company trades on the Alternative Investment Market (AIM) in London. So … you can trade them easily with an online brokerage account… without ever having to deal with the Chinese stock market.
“The company is perfectly located to reap the rewards. In China, cement companies are mostly regional. There is little profit in shipping outside of your geographic region, because of transportation costs.
“The company has two major production plants located in Shaanxi province, which is directly next to Sichuan province – which was the epicenter of the earthquake that devastated the region….
“Modernization of the provinces will help this company profit as well. China’s 11th Five Year Plan calls for the forced modernization of the infrastructure of the provinces – meaning bridges, roads, dams, railroad tunnels, highways, etc. Shaanxi province – where they’re located – is one of the areas targeted by this plan. Which means high demand for the firm’s product.
“China’s new environmental policies will actually help this company. China has become acutely aware of its massive pollution problem. The production of cement is a dirty business… so the government is insisting cement companies switch over to the New Dry Production Process. It’s cleaner and releases less carbon and other compounds into the air. Any cement company that has gotten in ahead of the curve on this innovation is going to receive favorable attention when the party hands out the funds – and this company was one of the first in the area to make this important change.”
Thinkolator takes a spin in the time machine, and tells us that this is still …
West China Cement (home listing is on LSE’s AIM at WCC, pink sheets listing is WCHNF)
This one still looks cheap based on earnings — the shares are way off of their highs — they hit about 250 pence back in 2007 during the China bubble, and when I wrote about them in May the shares were at 127 pence, today they’ve fallen by about half again, to 68 pence (about 98 cents). They went public in London a couple years ago at 105p, and are another one of those smallish Asian companies that has raised money on the public markets, but that remains controlled by a single shareholder. The going-public transaction was intended to raise funds for expansion.
In this case, about 54% of the shares are held by Chairman Zhang Jimin. So if you don’t like the way he runs his business, tough noogies for you.
That’s of course always the case for us individual investors — we don’t get to steer a company at all, or almost never. But at least we can hope that big institutional investors will push for better corporate governance in most cases. When insiders own more than half the shares, however, they can do pretty much whatever they want, and Goldman Sachs with it’s 5% stake can be safely ignored.
Often that’s fine, especially if there is only one class of shares so they can’t give themselves anything, like dividends, that they don’t also give to you. Sometimes it doesn’t work out for outside investors and a company can turn into a jobs program and a piggy bank for the CEO’s family and friends, but, as companies will often say, you can always sell your shares if you don’t like it.
Let me be clear, I’m making no such allegation for West China Cement, just sharing that there can be problems when one person controls a majority of shares.
But back to that valuation bit — we don’t know how the last six months has been for them, but going from the first six months of 2008 the valuation is certainly compelling. For the first half of 2008 the earnings per share (fully diluted) was 1.21 Renmimbi, which translates to twelve pence, so if you annualize that you get a PE ratio of about 2.8. The teaser information about their growth rate is accurate, so if you assume (and that may be a big assumption) that the company can continue to grow or that they will benefit from Chinese stimulus, then you’re buying a company with pre-tax earnings growth of 57% for less than three times earnings.
Shaanxi province, where West China is based, is just north of Sichuan, where the worst of the earthquake damage was — the biggest city, where West China is headquartered, is Xi’an. Anhui Conch, another Chinese cement company, is expanding with new plants in Sichuan and got a nice share price boost in return following that earthquake in the region — didnt’ last long, their shares have fallen roughly the same amount as WCC’s over the las 6-8 months.
West China was having trouble catching up with its backlog after the snowstorms last year, and is, according to their last announcements, running at full capacity already. I suppose it’s possible that they’ll wish to expand to try to grow to the south, but I have no evidence of that. Shaanxi is geographically right about in the center of the country.
We’ve heard of the “Tier two cities” phenomenon, whereby China and India are trying to build up regional cities and towns into business and employment centers, to prevent everyone from moving to the coasts, in the case of China, and further clogging the few largest cities. So being in the “hinterlands” in China is not necessarily a bad thing for a cement company, there ought to be plenty of business.
This is how they describe themselves, from the company website:
“The company business operation is in the Shaanxi, China under the brand name of ‘Yaobai Cement’. For many years, through technology progress, product promotion, low cost expansion as well as the enlarged scale operation, our company has become one of the ‘Top three biggest cement star enterprises of Shaanxi province’ and a famous enterprise in china building material industry from former small local factory at the foot of Yaoshan Mountain, Pucheng. In the year 2006, 2007 and 2008, the company has been listed three times in succession ‘100 Top Chinese Companies with Growing Potential’ in Forbes China list.
“West China Cement currently operates from three locations, all of which are in Shaanxi Province. The headquarters are in Xi’an, the two plants are based in Pucheng, Lantian and a new plant under construction in Ankang. All three of the Group’s plants utilise NCPP technology in their operations. It allows for an energy efficient manner of traditional cement production which limits the pollution caused by production.”
There are several other Chinese cement companies that are publicly traded, too, and probably hundreds that are not — Anhui Conch, which I mentioned, is another one that’s a bit easier to buy, and Asia Cement Corp went public last year. Others that you could look at if you wanted to compile a list might include:
Anhui Conch (AHCHF)
China Runji Cement (CRJI)
China Shuangji Cement (CNSJ)
Chia Hsin Cement (PKORF)
Sun Shin Cement (SINCF)
I have not looked at any of those, so do note that I’m not suggesting these are worth your time — they’re just a few of the other cement companies that can be bought on US exchanges.
So … it’s always hard to know if you’re getting the full story on companies like these, when the company operates in a very foreign environment and releases a limited amount of information, and when folks like most of us have very little access to information about businesses in central China. But on the valuation and growth rates, you’d have to say that it’s worth a second look. I’ll be curious to see how the second half of 2008 was for these folks, but we won’t be learning that until the end of March.
I don’t think we’ve had any reviews submitted of Without Borders yet on the new reviews site, but you can see some opinions about other Casey newsletters here (and if you’ve ever subscribed to Without Borders, by all means, please submit a review).
Happy Investing, all!