WE have selected the China economic boom as our third investment theme for 2004.
Across the region today, we are seeing substantial investor interest in Chinese companies listed on the New York, Hong Kong and Singapore exchanges.
It is not difficult to comprehend why the “China boom” theme was a favourite and recurring theme in Asian bourses throughout 2003. With an economy that has charged forward at an average rate of 7% per year in the last five years, and that will probably grow 9.1% in 2003 despite the Severe Acute Respiratory Syndrome, this is hardly a surprise.
China, it can be argued, has the world's most compelling growth story. And as it rises, China is shaking all kinds of markets all over, from driving up prices of commodities from copper to gas to sucking in billions of dollars of investments from foreign multinational corporations (MNCs).
Little wonder, then, that institutional investors all over the world are also clamouring for China stocks. The fact that Chinese shares have been shooting through the roof this year is another lure for foreign portfolio investors into China.
The Bank of New York's China index, a composite for shares of 25 Chinese companies traded on New York exchanges as American depository receipts, has climbed 55% for the year, while the broader MSCI Golden Dragon Index has risen nearly 40%.
Across the causeway, too, China companies that are listed on the Singapore Exchange Limited (SGX), including Sesdaq, are enjoying tremendous interest from investors there. And many of these shares have posted spectacular capital gains for investors in 2003.
We believe the “China boom” theme would continue to dominate in 2004. However, this theme does not seem to have caught on with investors on the KLSE.
Why the lack of such interest on the KLSE? The most obvious answer is that there are no Chinese companies listed on the KLSE. The Securities Commission's efforts to woo foreign-incorporated companies to list on the KLSE have thus far been fruitless.
There is also the misperception that there are no Malaysian companies with significant exposure in China.
While there are Malaysian companies selling their goods and services to China – such as the export of palm oil products by Malaysian plantation companies – there are few Malaysian companies with manufacturing operations inside China itself and catering to the Chinese and export markets.
So where do all these leave the Malaysian institutional investor, whom, because of exchange controls, are not allowed to invest in foreign markets without the prior approval of Bank Negara. And even when allowed, the local institutional funds are not permitted to invest more than 5% of their total funds under management in overseas-approved bourses.
But there is a way for local institutional fund managers to play the China boom, and that is to buy into Malaysian-owned and KLSE-listed companies that have significant manufacturing operations in greater China (i.e. including the two Special Administrative Regions of Hong Kong and Macau) and that are selling to the Chinese market (both domestic demand as well as to multinational corporations based in China) and/or selling to MNCs in places such as Japan, South Korea, Taiwan and the United States.
We are not talking about Malaysian companies that are merely exporting to China (otherwise we would have the whole gamut of plantation companies as “China plays”) but rather, we are looking for Malaysian companies with substantial manufacturing operations in China that are contributing in a meaningful way to their bottomlines.
We will attempt to identify KLSE-listed companies with interests in China that are contributing to their respective bottomlines. Malaysian companies where China is an integral part of their overall strategy are also included in our list.
That said, our list is by no means exhaustive, nor does it reflect our stock preferences. And while we are able to come out with more than 20 names, sadly, the majority do not have a meaningful presence or operations in China, or that their exposure in China are still at a very nascent stage of earnings contribution.
Still, there are some stocks that stand out, and which we believe are good or excellent proxies (including those with potential) to the Chinese market and booming economy.
Investors looking primarily for Malaysian stocks with China exposure might want to consider AKN Messaging Technologies Bhd, Kwantas Corp Bhd, LBS Bina Group Bhd, Malaysian AE Models Holdings Bhd, OYL Industries Bhd and Transmile Group Bhd.
Other Malaysian companies with significant interests in China for which we have yet to initiate coverage but which are potentially interesting are Ire-Tex Corp Bhd (soon-to-be-listed), Lion Diversified Holdings Bhd and Salcon Bhd.
Interestingly, companies involved in sewage and water treatment and/or distribution seem to have a penchant for expanding their reach into China.
At least four water and sewage and water-related companies in Malaysia have to date entered into joint venture agreements with mainland Chinese partners to undertake sewage treatment and water production, treatment and distribution in various cities in China. They include PBA Holdings Bhd, PPB Group Bhd, Salcon Bhd and YLI Holdings Bhd.
Gan Kim Khoon is executive director of AmResearch Sdn Bhd, a member of the AmBank group.
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