Peter Schiff’s China Infrastructure Stocks — Part 1, Construction and Agriculture

By Travis Johnson, Stock Gumshoe, April 22, 2010

The folks at Euro Pacific Capital, led by senatorial candidate Peter Schiff, are looking for clients for their international-focused brokerage house, which generally solicits US clients for building accounts focused on dividend-paying foreign stocks and precious metals, in keeping with Schiff’s basic strategies (which as far as I can tell is, in brief: dollar will collapse, fiat currencies doomed, export-led countries and commodity producers will dominate).

And every now and then they release a newsletter or special report that highlights a few of their favorite stocks — but just like our more traditional newsletter dudes, they know the best way to get a response is to withhold the actual details until the potential customer or client calls (or subscribes). In Schiff’s case he doesn’t want to sell you a subscription, he wants you to park your money with one of his brokers and generate some nice commissions as you buy into the stocks that he likes on foreign exchanges.

So if you don’t feel like signing up with Euro Pacific, or even chatting with one of their hungry brokers on the phone, how about we try to figger out just which stocks he’s teasing today? That is, after all, the Gumshoe way.

The basic thesis of his special report on Investing in China’s Infrastructure is that China will rise because of their high personal savings rate, high foreign reserves and low government debt, healthy banks, access to relatively low commodity prices (compared to the height of the commodity bubble), and, more than anything else, a huge government focus on stimulating the economy through building power generation, the electrical grid, roads and railways, and water conservancy and treatment projects.

And then, of course, we get some stock ideas … or at least, the ideas behind some stock ideas, without the actual stocks being named.

“We’ve identified four companies we think are in a position to ben- efit from the road map provided by China’s stated infrastructure goals. Top notch infrastructure companies to begin with, they offer a sound way to take advantage of the increased government subsidies …”

And what are those companies, you ask? Well, let’s start digging into the clues:

“Company #1 provides transportation infrastructure construction services in China. The company also engages in consulting, design, manufacturing, and development. The construction segment engineers and builds transportation projects and also constructs buildings and integral underlying support systems.

“Company #1 has benefited greatly from the increased investment in infrastructure in China, expanding its business and increasing its earnings significantly in the first half of 2008. Its five-pronged strategy is to strengthen its position in infrastructure construction by pursuing ambitious projects and producing high-margin products, expanding further into property development, exploring overseas growth prospects, and further improving its cost structure and operational efficiency.”

Well, they don’t exactly go out of their way to give a lot of specific clues in there, do they? Fortunately, they do also include a stock chart (though it conveniently neglects to have a price scale to it) … so who could this be?

Going off of the generic teaser for this construction firm, I narrowed it down — and then got an exact match on the shape of the chart, so I can tell you that this mus be: China Railway Group (ticker is 390 in Hong Kong, CRWOY or CRWOF on the pink sheets). CRWOY is the ADR, listed at 25:1, which means that each ADR represents 25 shares in Hong Kong — the shares trade right around HK$5.50, so 25 of those would be HK$137.50, which at the current exchange rate is about $17.70. CRWOF is a regular 1:1 pink sheet listing, so the fair price ought be be around 70 cents, but neither of these trades very much outside of Hong Kong.

Schiff teased out the sister company to this one, the other giant Chinese railway and infrastructure firm, last April in a similar newsletter — that one is China Railway Construction, it’s now at a fairly similar price to when I wrote about it in April of 2009, both of these stocks have followed a similar pattern over the last year, shooting up into August as the economy recovered, and moving down pretty steadily for the eight months following. These are massive, state-controlled companies (China Railway Group is 58% controlled by the Chinese govt.) that do a lion’s share of the big construction projects, including the big railroad expansions, and also work overseas (China Railway Group just got a huge Indonesian coal transport contract last month, for example, and they’ve been accused of labor violations regarding their workers on some big projects in Africa).

I’ll try to get to the rest of these stock ideas, so I won’t get too into the details of each one — you can dig in yourself if you like, Bloomberg says the PE ratio is about 40 or so, and this is about a $17 billion company (market cap). They have not ever paid a dividend (which makes them stand out as a bit different from most of the Schiff picks I’ve covered), but income has been growing.

Next?

“Company #2 helps to increase the scale and efficiency of Chinese agriculture by aggregating family farms into collectives – thereby increasing standardization and eliminating multiple layers of middlemen. Generally, the terms of the acquisitions require the company to offer upfront payments and employment contracts to farmers. This company helps improve profitability through investments in agricultural equipment, fertilizers, and pesticides. Farmers benefit through better pay and access to credit.

“We think this company has a promising future because of its unique business model, growth potential, and government support. Further, the financial statements have improved significantly in the last year and valuation is still attractive despite recent strength.”

Again, not a huge number of specific clues in there — but they did show a little chart of this stock’s movement over the past year, so I can confirm that they’re teasing:

Chaoda Modern Agriculture (ticker 0682 in Hong Kong, 1:1 pink sheets symbol CMGHF, 50:1 ADR on the pink sheets at CMGHY, both pink sheets listings trade in light volume).

I wrote about this one roughly a month ago for the Irregulars, following a Bryan Tycango teaser for the same stock — so not to repeat myself, I’ll just share an excerpt from that commentary here, I haven’t looked at the stock since then:

“Chaoda Mode