How to Make Money In China with FXI
The Dynamic Wealth Report
April 14, 2008
The Secret To Making Money In China
I was golfing with a good friend of mine a few weeks ago. He’s a hedge
fund manager in California and I convinced him to fly in for the day . .
. for a round of golf. It was on the course where I got some insight
into investing in China.
I picked Matt up from the airport and after a quick breakfast
we headed for the links. It was a beautiful day in Phoenix and the sun
was shining bright. Our 10:00 am tee time was rapidly approaching. We
coated ourselves in sunscreen and took a few swings on the driving
range. We were ready.
Now, I’m not a great golfer. But I always have a great time shooting a
round with friends. We drink a few beers and talk about the usual
topics. Life, family, and most of all -- money.
A successful hedge fund.
Matt’s running a very successful hedge fund. His success seems to grow
every year. Matt used to be an investment banker. He lived in Asia for a
few years and spent a great deal of time in Hong Kong and China. What he
observed was amazing. Every time he made it back to the States we would
get together. I would marvel at yet another story of exotic travel and
business opportunity.
His travels put mine to shame.
Knowing that Matt is an expert on the Asian markets and China in
particular, I asked him about the downturn in the market. He just
smiled. He didn’t need to say anything . . . I could read his mind. It’s
a great buying opportunity.
A few months back, when the Chinese market was at the top, many
professional investors still recognized value in the market. If they
recognized value back then can you imagine what they see now? Now, I
know what you’re thinking. The stories of sky high price to earnings
ratios are everywhere. Some P/E ratios in China reached 60, 70, and even
80.
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How can professional investors still find good buys?
In the US markets, companies have historically traded at a P/E ratio of
around 15 to 20. Chinese markets were considered very expensive by
comparison. But that ignores a very important driver of value. Growth.
The secret to investing in China is nothing earth shattering, despite
what you see on the internet. It’s in the growth rate.
Now before you shake your head, let me give you a quick example.
If you were to buy an average stock listed on the US exchanges you would
pay somewhere around 15 to 20 times earnings. So for every dollar of
earnings the company has the stock is worth between $15 and $20. A
company with $2.50 in earnings would be worth around $50 per share
($2.50 x 20 = $50).
In China the stocks were trading for 60 or 80 times earnings. So a
Chinese company earning $2.50 and trading at an 80 multiple would cost
$200 ($2.50 x 80 = $200). Seems kind of expensive right?
Not so fast.
The important piece of information that investors overlook is growth. In
the US, a decent earnings growth rate is around 5% to 10%. A US company
with $2.50 in earnings might grow to $2.63 or $2.75. In China a growth
rate like that would be laughed at.
Some companies in China have a growth rate of 70% or 80%. No, that’s not
a typo. This is the growth that gets professional investors very
excited. Our Chinese company with $2.50 in earnings would suddenly be
making $4.25 or $4.50 the next year. And best of all, the growth rate is
expected to continue for some time.
You can imagine the value of an investment after 10 years of growing at
that rate. Even at half that rate the prospects are very enticing.
So, how do we make money from this? My choice right now would be the iShares FTSE/Xinhua China 25 Index Fund (FXI). It provides good exposure
to China through the top 25 companies in the country. The top five
holdings include China Mobile a large mobile phone company, Petro China
the largest producer of oil, China Life providing insurance, and two
banks, Industrial & Commercial Bank of China and China Construction
Bank.
FXI peaked in November 2007 around $220 and is trading at
$140. This is a 36% discount and I really think it’s a great buying
opportunity for long term investors. And I think Matt might agree.
• Platinum & Precious Metals Index (Up 75%)
Since the beginning of the year the Platinum & Precious Metals index is up
more than 75%. Demand for precious metal commodities is up across the board.
Gold, Silver, and Platinum have all reached new highs in the last few months.
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