“The .25 China Stock You’ve Been Begging Me For” (Robert Hsu Rare Earths)

By Travis Johnson, Stock Gumshoe, February 17, 2010

Well, I’ve gotten a big ‘ol boatload of questions about this ad from Robert Hsu, so let’s dig in.

The teaser is for his Asia Edge newsletter, the expensive and somewhat more flexible letter that he edits — Hsu’s “entry level” newsletter is China Strategy, which focuses on US-listed ADRs of Chinese companies, but Asia Edge looks more broadly at pan-asian themes and picks stocks accordingly, including this Hong Kong-listed stock he teases today (don’t worry, it’s also on the pink sheets — or on second thought, maybe you should worry).

The stocks he claims great wins for in Asia Edge in this ad are Mechel, Vimpel and Mosaic — which probably most of us know are barely Asian and certainly not Chinese, though they’re influenced by the rise of Asia and Chinese demand for raw materials (Mechel is Russian steel, Vimpel Russian telecom, Mosaic global fertilizer based in Canada, just FYI).

And today, Hsu says he’s finally picking a smaller stock with “hugely explosive potential” — he calls this “The Most Profitable China Stock I’ve Seen in 20 Years (and unlike any other I’ve recommended previously!)”

Sounds exciting, no? And he even goes so far as to say that this one requires some work, as though the fact that you’ll have to make an effort means that you’re discovering a true diamond in the rough. The work, per Hsu, comes from the fact that this is a Hong Kong-listed stock without a US-traded ADR, and that buying it will be tougher than buying the typical Hsu recommendation.

Then he starts teasing about the specific company, though the clues are a little thin this time:

“This company I’m speaking of has cornered the market on the many of the world’s rarest raw materials …

“Today’s most advanced defense, medical, and high tech electronics simply won’t work without them.

“What kind of electronics am I talking about?

“Computers, LCDs, DVDs, magnetic memory chips, fiber optics, superconductors, mobile phone batteries, catalytic converters and precision optics—just to name a few.

“Do you realize what this means?

“Without the Cerium, Dysprosium, Europium, Erbium, Holmium, Neodymium, Thulium, Yttrium or other hard-to-pronounce rare earth metals this company produces, there would be No iPods, no LCD TVs, No LED lights, no catalytic converters, no medical lasers—and most important—no precision weapons.”

So this is a rare earths play — rare earth elements, rare earth metals, rare earth magnets, lanthanides, even “monazite metals” … they’re referred to using a lot of different names, especially by those who want to keep everything mysterious, but these rare metals are key ingredients in many high tech applications and have unique properties. They’re also (arguably) genuinely rare, and certainly rare in accessible concentrations for miners that can be profitably produced. China dominates the rare earth elements business, with almost all of the mining production for these elements and effectively all of the refining capacity, thanks to strategic decisions to flood the market with these elements many years ago, which shut down most of the mines and processing plants outside of China who couldn’t compete at the much lower prices China was driving.

Which leads us to today, when access to rare earth minerals is becoming a significant part of strategic planning for governments and companies around the world. These elements are still fairly inexpensive, and it’s still tough to compete with China on price even if you can build a mine or a processing plant, but for the last several years folks have been getting worried that China is just a bit too dominant in a business that has high strategic importance — not just for things like advanced batteries and consumer doodads, but for guided missiles and similarly critical defense products. And we can throw on top of the pile of concerns the continuing threat that China will cut off supplies to the rest of the world — you can argue about whether that cutoff would be for strategic or geopolitical reasons, or simply because Chinese industry requires their full supply, but export bans and quotas are a constant worry for folks like Toyota, which reportedly uses something like 25 pounds of rare earths in each Prius, and of course for hundreds of other high tech manufacturing companies and their suppliers.

So that’s the brief back story — and the reason why we see rare earth stocks teased with some frequency, and therefore I’ve written about them several times, including fairly recent pieces about rare earths in Greenland, and about what Stephen Leeb called “Technology Metals” when he teased a handful of these. If you want some background on this topic, I’d always suggest reading Jack Lifton’s stuff, he publishes a lot of rare earths analysis on his website here. You don’t have to agree with him, but he has done extensive research and presents some good arguments.

But this is a different approach: instead of teasing about the strategic importance of rare earth metals, and why companies and governments will make sure that explorers who are developing rare earths deposits outside of China will succeed, Hsu keeps it simple: China dominates rare earths, so let’s buy a Chinese rare earths company.

Here are a few clues about which of the Chinese companies he’s teasing — aside from the fact that it’s listed in Hong Kong and trades for about 25 cents:

“With China controlling 95% of all rare earth metals market and our top company claiming a 20% global market share, you can see why my palms itch in anticipation of the profits headed our way….

“… it’s no wonder why the company’s stock price doubled last year…”

So that’s about it — and, thankfully, that’s enough. As I was writing this up I noticed that our old friend WomanWithPortfolio also fingered the stock over at the Stock Gumshoe Forum, and I can confirm that she’s right — this stock must be …

China Rare Earth Holdings

And yes, it is listed in Hong Kong, where the ticker is 0769, and it closed overnight at HK$1.95, up 8% — which in the absence of any other big news should tell you that yes, Robert Hsu’s folks were probably snapping up shares, he’s got some big mailing lists and US investors who have accounts with E*trade, Interactive Brokers, Fidelity and some of the other big brokerage houses can trade directly in Hong Kong (just ask the talking baby in the E*trade ads). And at the current exchange rage HK$1.95 does equal almost exactly US$.25, so this is a 25-cent stock, for our purposes.

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You can, if you so choose, trade the shares in the US on the pink sheets, but the volume is much lower (this stock might trade 25 million shares on a typical day in Hong Kong, and maybe only 20,000 shares on the pink sheets — or it could not trade at all on the pinks on any given day) and it will quite possibly cost you — the pink sheets ticker is CREQF, and this morning the pink sheets trading, on the heels of Hsu’s excitement, got up to 29 cents. If you pay that much you’re accepting that it’s reasonable to pay roughly a 15% commission on the shares … or assuming that Hsu’s attention will drive the prices higher, or that he’s right and the stock will go up again dramatically in Hong Kong tonight (or soon). May be true, but paying a huge premium for the convenience of pink sheets trading is often a mistake — particularly because the reverse is also often true so you can lose both ways in the transaction, if you want to sell your pink sheets shares you often have to accept a discount price to the previous close in Hong Kong in order to get a nibble.

But assuming that you’re interested, who is China Rare Earth Holdings? They do claim a roughly 20 percent market share in rare earths products, it looks to me like they are primarily a refining and sorting company, they take the rare earth ores and create oxides and metals that can be used by various industries, and they also manufacture high-temperature refractory materials. They appear to be quite economically sensitive, as one would expect for a raw materials producer whose customers are probably largely electronics manufacturers in the US, Japan and China, so they did a lot better in 2007 and early 2008 than they did after the global recession hit — you can see their earnings reports here, the most recent release was for the first hal