US Listed Chinese Companies Hot Spot For Investors According To First Wilshire Portfolio Managers
November 11, 2009 - The Wall Street Transcript has just published TWST Small Cap Value Report offering a timely review of the Diversified Investments sector. This 47 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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FRED ASTMAN is Chairman and a Portfolio Manager at First Wilshire Securities Management, Inc. Mr. Astman served in the Air Force as navigator of both B-24s and B-26s in World War II and the Korean War. He earned a BA from the University of Connecticut and has been investing in the small cap sector since 1962.
SCOTT HOOD serves as President of First Wilshire Securities Management, Inc., and co-manages the portfolios. He has over 15 years of experience in the securities industry and has worked as an Analyst and Portfolio Manager at First Wilshire for 12 years. Mr. Hood also worked as a Supervisory Analyst with Merrill Lynch in Hong Kong and with a merchant/investment banking firm in New York City. He received his Bachelor of Science degree in Economics from New York University. He is a Chartered Financial Analyst and a member of the CFA Institute.
TWST: Tell us a bit more about the Chinese market, because the last time I talked to you, you said that the companies you follow are in the category of under 5 P/E. Has that changed now a year later?
Mr. Hood: Actually the Chinese stock market has had very high valuations. It's the U.S.-listed Chinese companies that we were following that had low P/E. Yes, their valuations have definitely gotten higher from the bottom. I think the Chinese stock market bottomed at the end of last November, but the real gains came after March. The Chinese stocks trading on Chinese exchanges were very pricy going into this downturn and got a lot cheaper. But their valuations have since increased, and our Chinese stocks have appreciated along with them, which was nice because they didn't always move together in the past. Nonetheless, the valuations of the Chinese stocks trading in the U.S. are probably half the P/E of the Chinese stocks trading in China.
Mr. Astman: The Shanghai stock market is trading at 30 times trailing earnings and 20 times estimated forward earnings. The Hong Kong market has a little bit lower P/E at around 22 times trailing, and 16 times forward numbers. The stocks that we're in are not in either of those exchanges and trade at lower valuations of 5 to 15 times P/E. They trade in the United States on NASDAQ, New York Stock Exchange, American Stock Exchange, etc. They comply with all SEC regulations and therefore have a little more visibility and oversight to them.
Mr. Hood: The reason why there are Chinese companies trading in the U.S. is that they need access to capital and they need to go public. It's very hard for smaller companies that are not tied to the government to go public in China, and it's hard to get bank debt as well if you're small, so they've sought other avenues of raising money. Getting listed in the U.S. has become more popular over the last 10 years. These companies have done well for the U.S. shareholders because they have higher growth but lower valuation than the U.S. companies and they have lower valuation than the locally listed equivalent companies. They have to abide by the U.S. standards of reporting disclosures as well.
Mr. Hood: There's one company in China called Shiner International, which is in plastic packaging. They're in some unique areas like anti-counterfeiting for products like cigarettes. They are also in the normal run-of-the-mill plastic packaging and that should be a good growth area over the next several years. The valuation of the stock is very much on the reasonable side.
Mr. Astman: Another one is China Pharmaceutical Holdings, which manufactures drugs and distributes them in China. Company does about 50 million to 60 million in revenues with forecast of 75 million for next year, which is a 25% increase. It trades at about eight times estimated earnings in 2009 and about six times estimated earnings in 2010. So again, we're seeing much higher growth in China. In other words, a company may be selling at 10 times earnings, but their growth might be 50% for the next three years.
Mr. Hood: China Pharmaceutical Holdings will have doubled its revenue this year from the 2007 level and should increase by well over 25% in 2010. They've really benefited from the government's emphasis on rural healthcare, which is part of their stimulus package. It has helped improve sales to the pharmacies and hospitals outside of the major cities, thereby benefiting the company.
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