“Rich Man’s Market… Stampede Out of China is Worth 2,507%”

Teaser picks from the Merchant Banker Alert

By Travis Johnson, Stock Gumshoe, September 28, 2010

Yesterday I looked at Martin Hutchinson’s teaser for his Merchant Banker Alert, and promised that I’d try to get to the other ideas … so since I’m a bit too sick today to start a brand new adventure with you, let’s keep gnawing at this bone for a while …

That article, by the way, is right here if you want to catch up with the rest of the class.

And the one that caught my eye is the “Stampede out of China” idea, all about the next hot market …

“The Stampede Out of China Is Worth 2,507%

“Most regular investors still think China is ‘big news.’ But the rich 1% know China is yesterday’s news.

“In fact, there is a veritable stampede of major companies leaving China.

“Google is leaving…

“General Electric is leaving…

“L’Oréal and New Balance are leaving…

“North Face, Lee, and Wrangler are picking up…

“Ford’s going and so is Mazda…

“Toyota and Honda closed down…

“Where are they going? Where the labor is cheaper and younger and still has 20 to 30 years of working life ahead.”

OK, so that’s at least a bit of an exaggeration — I haven’t checked the China plans of each of those companies, but Google, if they leave, will essentially be doing so because they’re forced out, and there’s no way that Toyota, Honda and Ford are going to “close down” in China, the world’s largest car market. That’s not to say that they might not be moving production elsewhere, but they’ll be making money in China.

The key then, seems to be that Hutchinson says the big companies are moving production to a cheaper and younger country. Which one?

We get a few clues — first, that foreign direct investment hit $9.58 billion in 2008 … which itself is enough to identify the country if you know where to look, and then he provides a few examples …

“Intel is starting production at its $1 billion-plant there as I write…

“A venerable Japanese cosmetics maker just completed a $42 million manufacturing plant there…

“And one of Mitsubishi’s major divisions is setting up shop there.

“Even Chinese companies are relocating to this investor’s paradise. They have 743 projects, amounting to $3.1 billion, spread across the country.

“As of July 2010, foreign investors have invested $93 billion into over 7,000 projects there. That’s an increase over 900% in just the last two years.”

OK … so I can tell you that the country is Vietnam, often cited as the next source of cheap labor with China growing somewhat more expensive for manufacturers — like a lot of countries, they started off at the very low end of the manufacturing totem pole, with textiles and sneakers and stuff like that, and they’re trying to move up into more value-added stuff (and higher paying jobs).

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I dabbled in one of the closed end funds that invests in China a couple years ago, then got out when that market weakened considerably, and it’s lagged behind many of its southeast asian neighbors in recent years. There’s now an ETF for Vietnam, too, and a stock market that’s gradually opening up a bit, but in many ways the marketplace is similar to China many years ago, dominated by very inefficient state-controlled companies.

Can we find out which firm Hutchinson is talking about? He provides a little bit more of a clue:

“Up until now, you had to be a private equity or hedge fund investor to get in on the “ground floor” of this global opportunity. All but the heaviest hitters were shut out.

“But now, I’ve found a way in for you.

“As a Merchant Banker, I’m pointing you to the “sweet spot” on the leading edge of global economic development.

“And note: This company has tapped some stellar American management talent with 50-plus years of experience in international business.”

OK, so that’s not so much a “clue” as it is a mere wisp of a hint. Let’s see … my guess is that he might be teasing the teensy tiny Cavico (CAVO), which I believe is the only real Vietnamese company that’s listed on one of the major markets in the US (not sure if that’s still true, but I suspect it is). This is a construction and infrastructure company, so they are kind of in a “sweet spot” for the development in Vietnam, considering that a lot of the development is new roads, new electrical generation (they’re working on a few hydropower projects) and new manufacturing plants, all of which demand local construction expertise.

The clues are not enough to confirm or deny this one as a pick for this particular newsletter, so I’ll have to leave it as a “best guess.” CAVO was traded on the bulletin board and over the counter for a few years before getting a Nasdaq listing. This one might merit some more digging, because it’s an odd looking operation — they have some subsidiaries that are also raising money on the exchange in Vietnam, including a mining and construction group, but if the numbers I saw on a preliminary snoop are accurate they are almost unbelievably small with a market cap of about $7 million. The small size could in part be because they have a number of joint stock companies/publicly traded subsidiaries that they apparently control. But still, if the basic Bloomberg and Yahoo Finance info is right (and it sometimes isn’t ) that’s one digit, seven, and million, not billion. They have lost money for a couple years, also not sure why, but for a company that sounds so ambitious about building up so many big infrastructure projects in a growing country I don’t quite get why they’re so tiny. Could just be that the state-affiliated construction firms get most of the work, or it could just be that they haven’t yet mastered the “profitability and growth” bit.

And of course, I mentioned that there is now a Vietnam ETF — it’s a bit odd, with several of its holdings, like Talisman Energy and CapitaLand, being quite large foreign companies (Canada and Singapore, respectively) that have relatively small businesses in Vietnam, but it is certainly the easiest and simplest way to get fairly broad coverage of Vietnamese business. It’s from Van Eck and tries to follow the Market Vectors Index, ticker is VNM and basic info is available here. If you’re used to more established and higher volume ETFs, do be careful, it’s not a perfect track for the Vietnamese market and it trades often at a bit of a premium (only 1% or so at the moment, but that’s quite a lot for most ETFs).

The ETF has sunk with the Vietnamese market for most of its existence, and has recently been hurt by macro things like inflation fears and the devaluation of the Vietnamese currency (the Dong), as well as, I expect, more generalized fears about the corruption and inefficiency of Vietnam’s budding “privatizing” companies. There are also a few closed end funds traded mostly in London for Vietnam, including the Vietnam Opportunity Fund that I owned for a while (that’s VOF in London, VTOPF on the pink sheets) as well as an infrastructure fund and a real estate fund (these are managed by VinaCapital, more info available here).

I’m still interested in Vietnam, but don’t own any of these at the moment — I expect this to be one of the faster growth economies if the global economy continues to recover (or at least, the Asian region), but I would expect it to be a very bumpy ride. There could well be a better and more indirect way of getting access to Vietnam (it’s possible that this is what Hutchinson is touting, can’t say for sure). But if you’ve got any thoughts on Vietnam, I’m sure we’d all be happy to hear them … now that this brings my mind back around to the subject, I think I’ll spend a bit more time looking through these funds and Cavico and see what there is to see.

And as long as we’re in Asia, here’s one more from the same teaser ad:

“Make 410% on the Oracle of Hong Kong

“… this Hong Kong firm … specializes in ‘cloud computing,’ where software is ‘rented’ and resides on the Internet instead of on a client’s servers.

“Cloud computing reduces the need for an in-house IT department, while delivering all the productivity of enterprise software. It also makes it easier to expand into mobile computing – a necessity when you’re competing globally.

“In short, cloud computer means BIG savings.

“Global Industry Analysts just issued a report predicting cloud computing revenues to reach $222 billion by 2015.

“This overlooked gem already operates in 50 countries and has 8,000 customers. This year, 50% of its revenues come from North America, 36% from Europe, and only 14% from Asia, including deep roots in India and China.

“Expect that 14% Asia figure to mushroom as recession hurts the West and Asian economies race on. Yet its share price… at only 5 times prospective 2011 earnings…makes it a cheap ‘Oracle.’

“Headquartered in Hong Kong, it has access to an unlimited supply of smart professionals who like living in a ‘Manhattan with top tax rate of 15%.’

“I call it the undiscovered Oracle of Hong Kong….

“ACTION TO TAKE: Buy this Asian powerhouse and expect 410% growth.”

No time to dig much into this one at all, but I did want to give you something else to chew on — this must be:

CDC Software (CDCS)

Is a Hong Kong company, valuation fits (forward PE of 5), as does the “cloud” focus (though who doesn’t have a cloud computing angle these days), and the 50 countries and 8,000 customers stuff also fits.

Is it a great buy? Well, it’s your money — you’ve got to make that call. I may look a little closer in the future, but wanted to at least get the name and ticker out for you.