Six years ago, the markets could not get enough China. The
iShares ChinaLarge Cap Fund (
quadrupled in just three years, and shares of
had surged 1,175% in the seven years before October 2007.
Though most of the hard-landing crowd has been discounted,
sentiment has clearly turned against the world's
second-largesteconomy .Shares of the largest China fund are down
12% over the past four years and have underperformed the S&P
500index by 77% over that period.
But those focusing on the short-term economic weakness, a
result of overcapacity and the government's attempt to reposition
economic drivers, are missing a very important figure thatwill
drive real long-term growth.
That is the amount ofinvestment needed over the next six years
to meet urbanization needs in the country and tosupport more than
300 million people that will be moving from rural areas,
according to the China Development Bank. That is nearly equal to
the population of the United States -- and all those people need
housing, utilities and a transportation network.
Currently, just 52% of China's population lives in cities.
That number is expected to increase to 60% by 2020. Double-digit
growth has slowed but the world's second-largest economy still
has a long way to go. Toput this into perspective, the United
States had a comparable urbanization level in 1920 but didn't
reach 60% for more than 20 years. China is on pace to do it in
less than a third the time.
Eight trillion dollars over just six years is a huge growth
driver, a stimulus package almost 14 times larger than the
efforts used to move the U.S. economy out ofrecession in 2009.
That stimulus package helped the China Large Cap fund return 80%
in theyear after the 2008 announcement.
The reform of economic drivers means that not all Chinese
shares will benefit, but investors should do well with a mix of
communications, transportation and utility companies. As a bonus,
I've included a pollution control company that has already booked
some major contracts in China. Last spring brought a historic
crisis of pollution to the major cities, and the urbanization of
300 million more people will only driverevenue higher for
companies like the last company mentioned below.
China Unicom (
is the third-largest telecom company in China at $35.8
billion. Total revenue jumped 19% in the first half of
2013, to $23.1 billion, as subscribers upgraded to 3G
services. The company has consistently gainedmarket share
from a larger rival,
China Mobile (
, by focusing on lower-priced phones whileoffering
comparable services. Investors have been worried about
expenses as selling and marketing costs increased 25% over
the comparable period last year to $3.3 billion. Shares
have been under pressure for the shrinking margins, but
this could present a great time to buy for new investors.
The faster increase in marketing expenses now may lead to
higher future revenue against slower growth in expenses,
boosting top- and bottom-line growth.
The only Chinese railroad traded on the U.S.market ,
Guangshen Railway (
is my favorite of the group. More than 50% of the country's
trade is transported by rail, more than any other developed
nation, and the industry carries more than three times the
passengers and freight than carried in the United States.
More than 240 million people traveled by train during the
40 days of this year's Chinese New Year celebrations. More
people moving to the cities willmean more trips by rail to
visit family in rural areas.
Shares of GSH do not have thevolume of other picks but
trade for just 0.8 timesbook value and pay a 2.4%dividend
yield . Revenue is expected to rise 10% this year on
smaller government programs, but the company is the best
positioned to take advantage of the shift in urbanization
and growth in infrastructure needs.
With amarket cap of $13.9 billion,
Huaneng Power International (HNP)
is China's largest provider of electricity. The economic
slowdown has hit the company with revenue increasing just
1.4% in 2012 to $21.5 billion, but the drop in coal prices
helped the company decrease cost of revenue by more than 8%
and boosted itsgross margin by a third to 31%. The shares
trade cheaply at just 9.7 timesearnings despite a strong
3%yield . The recent drop of 20% in the share price offers
long-term investors a more reasonable entry point.
Beyond the long-term potential providing electricity to a
rising urban population, I think Huaneng Power will
eventually unlock some serious shareholder value
throughasset sales . Though electricity production accounts
for 98% of the company's revenue, Huaneng Power is also
involved in a mix of other segments, including cargo
transportation, port management andwarehousing services,
machinery leasing, and industrial waste management.
However, the company lost $8.2 million on revenue of $98
million among those segments in 2012. Asale of these assets
to a company that can more efficiently manage them could
meancash to shareholders -- and a more efficientbusiness
Fuel-Tech (Nasdaq: FTEK)
recently reported $5.7 million in new contracts from an
existing client and three new Chinese customers for
optimization systems and emission control of coal-fired
plants. The $89 million Illinois-based company provides
pollution control systems to customers worldwide. Revenue
has grown by 10% a year since 2009 to $97.6 million last
year. Shares are down almost 90% since the 2007 high but
have settled at $4 a share to trade at book value. This is
a company with highupside on a return of investor sentiment
or a strategic event like amerger oracquisition .
Risks to Consider:
Thestocks are bound to be volatile over the next year as
investors weigh the extent of the slowdown in China. Investors
need to be able to wait for this massive long-term growth driver
to send shares higher.
Action to Take -->
Even if the full $8.1 trillion of required investment is not
realized, the recent sell-off presents a great long-term
opportunity for investors to get back into select Chinese