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Let Insiders Show the Way to Profits from Chinese Growth
By
Michael Brush
December 08, 2005
Given that China’s economy is growing at a rapid 9% annual clip as the
government pulls out all the stops to invest heavily in infrastructure ahead
of the 2008 Olympics – it’s easy for investors to get sucked into the China
story.
But picking stocks is tough. Transparency is low, making it hard to figure
out all the moving parts of companies that operate there. And in the
background likes the risk of government involvement in the economy – which
can produce surprises at any moment.
So why not let insiders show you the way?
Investors got that chance recently as insiders scooped up shares of two
U.S.-listed companies with big – and growing – exposure to China. They are:
China Automotive Systems (CAAS),
which makes car parts, and Trio-Tech International (TRT)
a chip testing company.
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China Automotive Systems
With all the growth in China, the country has an expanding middle class –
and the government wants it to spend more. The official reason is that China
wants to boost imports to ease trade tensions with the U.S. But Chinese
politicians probably also know a little more consumerism might help them –
by taking some of the edge off any ill-will towards political leaders.
In an effort to boost disposable income, the government has recently lowered
taxes for farmers, raised minimum wages, and approved plans to raise the
thresholds for income taxes. Even without this kind of help, Chinese
consumers have been increasing their spending at a double-digit pace, thanks
to all the job growth.
Given that China is putting in so many new highways as part of its
infrastructure upgrade, it’s not hard to imagine one item the new Chinese
consumer will want is a car. That’s one reason China’s commerce department
predicts the number of cars will double by 2010. In the first nine months of
2005 demand for cars came back from a lull last year, with sales increasing
10%.
One play on this trend is China Automotive Systems, the second largest
supplier of power steering components and systems to the Chinese car makers.
Key customers include major players in the sector like Brilliance China
Automotive Holdings, the state-owned BeiqiFotonMotor, DongfengAuto Group,
China FAW Group, and Chery Automobile.
China Automotive Systems shares had been in decline all year – falling as
low as $4.10 from $12. But in November shares jumped after the company
reported quarterly results. The stock traded above $9, where a vice
president bought $477,000 worth. The stock has since pulled back to about
$7.80.
China Automotive Systems shares are not cheap – with a price to sales ratio
of about 2.8. But the company has about 60 cents a share on the books. And
besides the potential in the Chinese auto sector, new lines of business may
add to growth. Earlier this month China Automotive Systems struck a deal to
make air pressure sensors for one of India’s largest automakers.
Trio-Tech International
While China Automotive Systems has direct exposure to the Chinese consumer,
tiny Trio-Tech International is shifting operations around the globe to take
advantage of cheaper labor in China. The semiconductor test and equipment
company recently sold a plant in Ireland and bought another one in China.
For a company in a sector that is in an uptrend, Trio-Tech International is
dirt cheap. It has a price to sales ratio of just .74, but it’s really much
lower when you consider how much cash Trio-Tech has. The company has so much
money it is literally giving it away.
Trio-Tech recently announced a 50 cent per share cash dividend payable on
January 25, 2006 to shareholders of record on January 10, 2006. That will
still leave over $1 per share in cash. The stock recently traded for about
$5.70.
Interestingly, insiders – including the chief executive – bought in the
$5.40 to $5.85 range in October and November after the stock had already
made a big move up from $4, according to Thomson Financial. That suggests
there’s more to go on the upside. The stock’s cheap valuation confirms this
– though clearly it carries a discount in part because the company is so
small. It has a market cap of just $16 million.
The bottom line: Many economists worry that Chinese growth may slow
down dramatically after the 2008 Olympics. And the semiconductor cycle is
notoriously tough to predict. For now though, trends in both areas look
healthy, and insiders are telling you these two stocks are a good way to
play each of them. I’d buy each right here.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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