Invest in China’s Infrastructure — Robert Hsu

By Travis Johnson, Stock Gumshoe, January 24, 2009

Robet Hsu is out with a new little tease for us, and he thinks China will continue to be the one remaining bright spot in world economic growth. Of course, his two investment newsletters (China Strategy and Asia Edge) depend on China and its neighbors exciting investors, so that’s no surprise. He was one of the favorite investment advisors among my readers for a while back there in 2007 and early 2008, when it seemed like China could only grow to the sky — I certainly hear a lot less about him since the Chinese markets have suffered more or less the same fate as all the world’s equity markets, but he’s still out there — and he still sees opportunity in China.

The big catalyst now is the Chinese version of the bailout/stimulus activity — China is trying to spend a few hundred billion dollars stimulating their economy (and unlike us, they won’t be fighting about it for a few weeks and adding in Congressional pork along the way — though it’s an easy bet that the funds will flow to party favorites somehow or some way. Hopefully the concrete they pour will be stronger than the stuff tested by their awful Sichuan/Chengdu earthquake last year.

So what does he tell us about how to profit from the expected infrastructure boom in China in the months ahead?

Here’s the tease, with some clues:

“All of this bodes well for Chinese companies, especially infrastructure plays. And that’s why at China Strategy, we have aligned our portfolio to take advantage of the increase in infrastructure spending from China’s stimulus package. My favorite Chinese company set to benefit from all this spending is China’s leading producer of aluminum and alumina.

“This company has benefited from China’s solid demand for aluminum in its construction, transportation, electricity and packaging industries. In fact, China’s aluminum demand jumped 43% last year!

“Now, with China’s stimulus package and increase in infrastructure spending this year, I’m expecting this company to growth around 20% this year. As the need for alumina and aluminum rise this year, the shares of this company are headed higher.

“Since I recommended this company in late November, my China Strategy subscribers are already sitting on a nice 39% gain in just three months! But it’s not too late for you to get on board. I’m expecting to see even more profits this year as more funds from China’s stimulus package are dumped into construction projects throughout the country.”

OK, so there are a few clues scattered about in there … but really, once you say “China’s leading producer of aluminum and alumina” you have to be talking about …

Aluminum Corp of China, commonly known as Chalco (ACH)

This was a popular stock back in the heat of the China bull market, of course — it came up in this space a couple times, both as a Hsu idea and as a recommendation of Mark Skousen. It spit out some nice dividends for a spell, and briefly became a relatively high-yielding company, but it currently yields (on a trailing basis) a fairly pedestrian 3% or so. Future dividends will depend on profitability, one expects.

And the shares have had a supremely wild run — they got close to $100 back in late 2007, then collapsed with the other China stocks, and in the worst of last Fall’s market they got down to about $7 … right now, shares trade right around $10.50. The company has been profitable to this point, though with aluminum prices cratering the state felt the need to step in and buy a bunch of aluminum at a premium price back in December to prop up the producers.

Which should probably be no big surprise, since Chalco is the listed part of the dominant aluminum company in China, Chinalco, which is controlled by the government.

If you think aluminum markets will recover, and particularly if you think China will resume it’s insatiable demand for the stuff, perhaps Chalco will be a big bet going forward — I don’t know much about that market, but if you’ve got an opinion I’m sure we’d all like to hear it. It’s been a tough business lately — if you compare ACH to Alcoa on a one year chart you can see that, with some fluctuation, they’ve basically spent the last year ending up in the same sad place — if you go back further, ACH had a nicer run for a while thanks to the 2006-7 China boom.

Will the infrastructure stimulus in the Middle Kingdom bring back those boom years, and drive aluminum prices higher again? Or will the state work harder to prop up the outside investors in its largest aluminum company?

Nope, i can’t answer those either — your turn!

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