“Billion Dollar SSE: Locking Down China’s Steel Industry”

By Travis Johnson, Stock Gumshoe, July 16, 2008

This one comes in from Bill Mann at the Motley Fool’s Global Gains service, which I’ve looked at several times before — and I’ve also liked a lot of their picks and have invested in a few of the same companies personally, so I usually pay extra attention to their ads.

Which doesn’t make them any shorter, unfortunately — as with all Motley Fool email ads, this one would require a serious binding if printed out, and the felling of a few trees.

This is a follow-on to the general focus that Global Gains has had on “Tier Two Cities” in China and India — focusing on companies that are poised to profit from the growing smaller cities that most of us haven’t yet heard of, and that most investment analysts don’t visit. Past picks along these lines have included Home Inns (HMIN), HDFC Bank (HDB), and a few others that don’t immediately spring to mind. As one might guess from the collapse of the Chinese and Indian markets, none of those picks are doing particularly great at this moment (I do own shares of HDB, for full disclosure).

The thesis is probably reasonable, though, since in China in particular there is a strong governmental focus on making sure that the hinterlands improve and rural poverty rates decrease, and regional cities get more appealing, to cut down on mass migration to the coastal cities and make sure there’s not a peasant uprising on the horizon.

And that’s part of what the Motley Fool is selling here — the regional buildup, with a particular focus on Xi’an, since Bill Mann and his analysts recently visited that area in their trip through China.

Let me give you a taste of the ad first.

The Global Gains folks call the companies they’re interested in “State Sponsored Enterprises”, which is a play on the State Owned Enterprises that are the huge, inefficient, lumbering giants of old Chinese industry. Like most folks, they want to stay away from state-owned firms because the entrepreneur-owned firms are generally much more profitable and predictable, but this is sort of a blend. The government realizes that their old national companies are being beaten out, so they’re trying to nurture the strongest ones and push for mergers in the industry to get the strong players together and build up some really good companies.

So what we’re looking for here is …

Billion Dollar SSE’ No. 1 — Locking down the planet’s largest steel industry

“Does it surprise you to hear that China is the world’s largest consumer and producer of steel? It surprised me. Especially when I heard that more than 1,100 independent steel companies are stumbling over each other to get it done.

“That’s one problem Beijing is determined to fix, beginning by consolidating the hundreds of SOE steel producers. Even if it means allowing one private company a big piece of the action.

“By 2020, the State’s written goal is to concentrate a full 70% of domestic production among the top 10 producers — up from less than 35% today. There’s only one catch.

“In China, as elsewhere, mergers come at a cost, often including the loss of the primary local employer and source of tax revenue, not to mention the political cost to local officials.

“No wonder Beijing’s consolidation mandate met resistance at the provincial level. But again, that’s great news for investors like us.

“You see, I’ve uncovered one remarkable company that has found a way to gobble up China’s best-run SOE steel producers, while preserving jobs, tax revenues, and political clout at the local level.”

So that’s the company we seek — what are some specific clues we get?

“… the company is China’s oldest private steel producer.”

“…its charismatic leader rose from poverty to national hero, even earning a spot as one of two entrepreneurs representing China at the Asia Pacific Economic Cooperation forum.”

The company’s goal is to become the “largest, most profitable steel company in China — primarily by acquiring the nation’s best-managed steel manufacturers — leaving the weaker sister SOEs to wither on the vine.”

And they’re apparently doing this using “a strategy of entering into joint ventures with its acquisitions, thereby satisfying the provincial and State government, while keeping top managers on board and eliminating the tensions associated with all-out takeovers.”

Because the government is trying to weed out the weak state-owned enterpirses and spur consolidation, which is setting low prices for these companies, Mann believes that this is a “once in a lifetime opportunity” to build up these assets at low prices.

And remember that I mentioned Xi’an? That’s apparently one of the keys to this company’s future … in Bill Mann’s words:

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