A few days ago I noted that if there were a reasonable Chinese cement company to invest in, that I’d consider doing so. Immediately, several readers tossed some ideas on the pile for me to consider … and though it was a throwaway comment, more or less, I thought I might better take a look.
Especially when a few folks alerted me to the fact that one of the new services from Casey Research, called Without Borders and put together by Fitzroy McLean and Simon Black, recently began teasing a Chinese cement company as one of their favorite low risk picks.
(My comment that started this, by the way, was in the context of me noting that I sold my shares of Cemex last fall, partly because Cemex is so heavily weighted in the Western Hemisphere and the US and has had trouble getting into Asia — clearly, that decision to sell on my part was quite premature. So, another good reminder for all of you that I can be an idiot. Doubtless many of you didn’t require such a reminder.)
So let’s dig into this Casey pick for a cement company. What kind of clues do we get?
Well, you can read the whole teaser article here if you like — or in lots and lots of other places, they appear to do much of their marketing by providing these “free” articles for republication to hundreds of websites, which I imagine is cheaper but probably less effective than the more typical email campaigns most publishers use. The free articles are just as much a tease as the emails that provide tantalizing clues but neglect to include the name of the company, so we can work with them just the same.
This Without Borders newsletter is normally priced at $199 a year, by the way — sort of middle of the road as far as prices go (though it looks like it’s the cheapest newsletter on offer from Casey’s bunch), and they’ve got lots and lots of competition from newsletters that are jumping on the “undiscovered foreign stocks” bandwagon.
As an aside: If there were a way to track and count new newsletter introductions, it wouldn’t be surprising if they turned into contrary indicators — when we get to the point that there are 50 new foreign investing newsletters introduced in six months, does that mean we should pull back and focus on US stocks? Just wondering, I have no such data.
But anyway, we were looking for a stock idea, yes? Still with me?
Good. I admire your patience.
Our clues, in the words of our fair touters:
“We are currently following a Jersey-domiciled, London-traded cement company based in the western China province of Shaanxi (not to be confused with the neighboring Shanxi province…). Shaanxi is one of the fastest growing provinces in China, and this cement company is ideally positioned to capitalize on this growth. Currently trading on London’s Alternative Investment Market (AIM) at only 6.4 times earnings and 4.6 times current assets, this stock is as undervalued as it gets, especially considering the growth prospects.
“While it has already provided us with solid profits, we see it as a relatively near-term double from today’s levels. But we digress from the central point here… which is, because it trades on the London AIM, and not Shanghai, your shares have nowhere near the volatility.”
Well — “as undervalued as it gets,” I like the sound of that.
And as I noted, Chinese cement is an appealing business sector for me. I thought so before the terrible earthquake, and, awful as it sounds, that disaster seems likely only to increase demand for building materials in China.
Cement is one of the businesses that can often create a nice competitive advantage for a company, even though it’s a commodity product — that’s because it’s so incredibly heavy and hard to transport that companies can often have a near monopoly over their geographic area, especially if there are any restrictions on new competition (permits, access to quarries and raw materials, transportation infrastructure and network, lack of enough business to support a profitable competitor, etc). Cemex has added to that by upgrading customer service and using technology more effectively than most of their competitors, but even small-time local cement companies can look awfully good from a sustainable profitability perspective.
So that’s why I have some fondness fpr cement as a general investing idea in the infrastructure sector … and those are the clues we get from Without Borders. What’s the company?
Thinkolator spins and spins, mixing up the aggregate, and tells us that this is …
West China Cement (home listing is on LSE’s AIM at WCC, doesn’t appear to trade on the pink sheets)
This one does certainly look cheap based on earnings — the shares are way off of their China-bubble highs from last year, but have been climbing out of a dip in the last few weeks and are currently trading around 127 pence ($2.40 or so). They went public in London about 18 months ago at 105p, and are another one of those smallish Asian companies that has raised money on the public markets, but that remains controlled by a single shareholder. The going-public transaction was intended to raise funds for expansion.
In this case, close to 60% of the shares are still held by Chairman Zhang Jimin. So if you don’t like the way he runs his business, tough noogies for you.
That’s of course always the case for us individual investors — we don’t get to steer a company at all, or almost never. But at least we can hope that big institutional investors will push for better corporate governance in most cases. When insiders own more than half the shares, however, they can do pretty much whatever they want, and Goldman Sachs with it’s 5% stake can be safely ignored.
Often that’s fine, especially if there is only one class of shares so they can’t give themselves anything, like dividends, that they don’t also give to you. Sometimes it doesn’t work out for outside investors and a company can turn into a jobs program and a piggy bank for the CEO’s family and friends, but, as companies will often say, you can always sell your shares if you don’t like it.
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Let me be clear, I’m making no such allegation for West China Cement, just sharing that there can be problems when one person controls a majority of shares.
But back to that valuation bit — earnings last year were Pounds 10.7 million, off of a market capitalization of Pounds 85 million or so — so indeed, a PE ratio of something in the neighborhood of 8 on a trailing basis. Not bad for 70% growth. The PE is a bit higher then that teased, primarily because the shares have gone up by 10-20% from their bottom a month or so ago.
Shaanxi province, where West China is based, is just north of Sichuan, where the worst of the earthquake damage was — the biggest city, where West China is headquartered, is Xi’an. Anhui Conch, another Chinese cement company, recently announced that they were expanding with new plants in Sichuan and got a nice share price boost in return.
Not that the earthquate necessarily matters, since West China was having trouble catching up with its backlog after the snowstorms, and is, according to their last announcements, running at full capacity already. I suppose it’s possible that they’ll wish to expand to try to grow to the south, but I have no evidence of that. Shaanxi is technically right about in the center of the country, but at this point it seems like it doesn’t necessarily matter where you are in China — they’re building everywhere, and they’re building flat-out, with cities sprouting like mushrooms in nearly every corner of the country.
We’ve heard of the “Tier two cities” phenomenon, whereby China and India are trying to build up regional cities and towns into business and employment centers, to prevent everyone from moving to the coasts, in the case of China, and further clogging the few largest cities. So being in the “hinterlands” in China is not necessarily a bad thing for a cement company, there ought to be plenty of business.
I don’t know much about the competition, though my sense is that with the demand for resources it would take government price controls to keep cement prices low, I don’t imagine that competition would be enough to do it. And the government is paranoid about their sky-high inflation rates, so perhaps there are or will be price controls that might keep WCC’s profits from growing particularly fast. There are a few other cement companies in Shaanxi province, according to West China.
And in the last earnings release, they noted that business and competitive positioning was good: “On the supply side, the PRC Government is controlling the establishment of new cement plants and closing down inefficient and polluting plants. This provides a good basis for strong cement prices.”
This is how they describe themselves, from the company website:
“‘Top three biggest cement star enterprises of Shaanxi province’ and a famous enterprise in china building material industry from former small local factory at the foot of Yaoshan Mountain, Pucheng. At the beginning 2006, the company as the only famous Shaanxi enterprise is ranked 54th out of ‘100 Top Chinese Companies with Growing Potential’ in Forbes China 2006 List.”
Sales and profts were both up by roughly 70% year over year when they last released results, in March, as I intimated above. You can read those filings yourself here. If they can keep that up for a few years, then certainly the valuation is ridiculously low … all other things being equal (which they might not be).
There are several other Chinese cement companies that are publicly traded, too, and probably hundreds that are not — Anhui Conch, which I mentioned, is another one that’s a bit easier to buy, and Asia Cement Corp is apparently going public in a matter of days (in Hong Kong). There’s a good article from Marketwatch over the weekend that talks about the earthquake and the positioning of some of the cement companies. Others that you could look at if you wanted to compile a list could be:
Anhui Conch (AHCHF)
China Runji Cement (CRJI)
China Shuangji Cement (CNSJ)
Chia Hsin Cement (PKORF)
Sun Shin Cement (SINCF)
I have not looked at any of those other ones yet, they could all be frauds for all I know, so do note that I’m not suggesting these are worth your time — they’re just a few of the other cement companies that can be bought on US exchanges.
So … it’s always hard to know if you’re getting the full story on companies like these, when the company operates in a very foreign environment and releases a limited amount of information, and when folks like most of us have very little access to information about businesses in central China. But on the valuation and growth rates, you’d have to say that it’s worth a second look.
Happy Investing — tough market today, but the sun will come out tomorrow. Or maybe the next day. Or the one after that.