Open Sesame
FALLS CHURCH, Va.–We’re in. The drama has just begun, and Alibaba.com (Hong Kong: 1688 HK) is now public. The company’s initial public offering (IPO) took place yesterday. And, as expected, it was very successful, trading more than 500 million shares and closing at HKD39.50.
There was a lot of speculation on the Internet in the days leading up to the IPO, led by publications like Taipan, that falsely indicated that US-based investors weren’t allowed to purchase Alibaba.com. If you followed my advice—that a good online broker would have no problem executing an order—you should now own Alibaba.com shares. (See the Nov. 2 issue of Silk, 1688 HK.)
Given the company’s high valuations, viewing it as a speculative play should be the right approach for now. But don’t underestimate its potential if the markets remain reasonable strong to the end of the year as I expect them to.
Alibaba.com is the new addition to the Silk Alternative Holdings Portfolio. Buy Alibaba.com.
Led by India and China, Asian economies have been growing as a whole by an average of 8.5 percent in the past five years, easily outperforming global growth.
Furthermore, Asia’s share of the global economy has grown to 31 percent in purchasing power parity (PPP) terms. Since Asia’s economic transformation is still in the early stages, and China’s urbanization ratio is about where Japan was pre-1940s, expect this number to continue to improve over time.
In addition, Asia ex-Japan is now the world’s biggest holder of foreign reserves, which at USD2.8 trillion, represent almost 50 percent of the world’s total. The expansion of global trade has also been very beneficial to the region since it now accounts for 20 percent of global merchandise exports.
As a result, Asia has been easily outperforming global markets, a process that started in earnest at the end of 2001 as the chart below demonstrates. The chart depicts Asia’s extremely strong market performance against the MSCI global markets index. Note: Data have been normalized for easy comparison—i.e., base equals 100.
In the current environment, all dips in Asian markets should be viewed as buying opportunities. (See the Oct. 10 issue of Silk, Buy the Dips.)
Source: Bloomberg
On Nov. 5, the Hong Kong market was down 5 percent after the Chinese Premier, Wen Jiabao, commented on the qualified domestic retail investor (QDRI) program that will allow mainland citizens to buy stocks in Hong Kong. Unfortunately, the comments were taken out of context, and a lot of people assumed that the Premier was indicating that the Chinese government is preparing to scrap the program.
But my understanding is that the government is working with financial regulators on the mainland and Hong Kong to implement the program to minimize shocks to the domestic financial markets and economy, the classic gradual approach of the Chinese government.
True, the Hong Kong market has run ahead of itself since the lows in August and was looking for some excuse to correct, but I still expect that the program will be implemented. Therefore, it will increase the liquidity of the market as more funds will be easily allowed to circulate.
The Hong Kong bull market still feeds off China’s strong earnings growth and global liquidity conditions that allow investors to buy one of the biggest growth stories of our time. A delay of the QRDI program will only prolong the bull market as investors anticipate the final outcome.
The Silk portfolios offer a good selection of energy related stocks that you could buy with the proceeds and continue to benefit from the energy bull market. Lukoil (Russia: LKOH, OTC: LUKOY), OAO Gazprom (Russia: GAZP, OTC: OGZPY), Sinopec (Hong Kong: 386, NYSE: SNP), and Yanzhou Coal (Hong Kong: 1171, NYSE: YZC) are the obvious candidates. Sell Royal Dutch Shell.
The company generates 44 percent of its revenue from emerging markets and has benefited tremendously from growth in China and India. Upcoming project in these two countries will also benefit ABB in the future. China plans to invest USD125 billion in power plants and USD134 billion in power transmission and distribution in the next five years, and India’s commitment to bring power to 120,000 villages in the next five years will also benefit ABB’s operations.
Since a lot of developed economies (particularly the US) are planning to increase their power generation dramatically in the next decade, ABB is now in the middle of one of the most powerful investment trends of the future.
Under these conditions, the company will be able to grow earnings at very high rates and will attract more investor interest as it achieves success in this front. ABB remains a buy.
United Overseas Bank (Singapore: UOB, OTC: UOVEY) had an unexciting quarter to report on; earnings were down 14 percent for the quarter and up 8 percent on a year-over-year comparison. However, the company remains my favorite way for exposure to Singapore’s long-term economic success story, and I expect better performance in the next few quarters.
For Long-term investors United Overseas Bank’s moves beyond its home market are of bigger interest. The bank has increased exposure to Thailand and solidly grown Indonesia through outright acquisitions of local financial institutions (in Thailand) and participation in other banks (in Indonesia).
Of particular interest is its acquisition of 10 percent in Vietnam’s Southern Bank, one of the top banks in the country. It has been agreed that United Overseas Bank will purchase an additional 10 percent once regulators allow such an increase in foreign ownership. Because of Vietnam’s frontier economy status and extraordinary long-term economic growth potential, this move will prove a big positive to United Overseas Bank’s future growth. Buy United Overseas Bank.
Chunghwa Telecom (Taiwan: 2412, NYSE: CHT) continues to offer solid execution and predictability. Third quarter revenues were up 2 percent with profits up 8 percent on a yearly basis.
Broadband and 3G remain the main growth drivers, as the company continues to aggressively upgrade its broadband subscriptions, while 3G revenue continue to grow strongly as returns per user are 6 percent higher than those of 2G. The company’s 5.3 percent sustainable dividend yield makes it a good defensive portfolio holding. Buy Chunghwa Telecom.
Dr. Reddys Labs (NYSE:RDY) didn’t offer any surprises with its numbers. The company is my preferred way to get exposure to emerging global pharmaceutical companies, and the upside potential is big. The company continues to experience steady growth in its markets (US, Western Europe, Russia, India) while controlling costs by moving high-cost operations to India.
Since 60 percent of its sales are in overseas markets, the strong rupee has been a drawback. But good growth numbers (especially in the all important US market) have been able to smooth things out. The company has a strong research pipeline, focused in the areas of cancer, diabetes, cardiovascular, inflammation and bacterial infections.
Because of the stock’s weak performance this year, valuations remain very attractive, offering a good entry opportunity for the long-term investor. Buy Dr. Reddys Labs.
AU Optronics (Taiwan: 2409, NSYE: AUO) is Silk’s technology exposure. The most recent results were better than what the market was anticipating; the stock has been re-rating for sometime, taking its cue from strong cyclical upturn in the thin film transistor liquid crystal display (TFT LCD) industry. The stock’s performance gives credence to patient investors as the year-long wait since my original recommendation has produced a 50 percent return.
I expect further strength in the upcoming quarters. Also, management continues to deliver in its plan to reduce debt levels and has been anticipating a dividend increase because of the company’s improved balance sheet and good cash flows. Buy AU Optronics.
Keppel Corporation (Singapore: KEP; OTC: KPELY) remains operationally on track since it delivered a strong 23 gain in quarter profits. The company remains a double play on global (through its rig manufacturing and infrastructure divisions) and domestic (property division) economic growth. Its offshore divisions accounted for 54 percent of profits, and its property division tallied 21 percent.
Its infrastructure division has been a laggard in recent years, but new projects in the Middle East—where I expect strong economic growth to continue—are helping management to turn things around. One of the best quality companies around, Keppel Corporation remains a buy.
Mitsubishi Heavy Industries (Japan: 7011, OTC: MHVYF) reported strong first half numbers with earnings up 26 percent. Its order backlog was also strong, up 16 percent, on a yearly comparison.
Mitsubishi Heavy Industries is another company that offers infrastructure exposure. Its operations are concentrated in power systems (52 percent of profits), machinery (29 percent) and aerospace (13 percent). Mitsubishi Heavy Industries remains a buy.
Yanzhou Coal (Hong Kong: 1171, NYSE: YZC) is Silk’s play in the Chinese domestic coal market as two-thirds of the company’s sales are in the domestic market supplying Chinese power and steel companies. The rest of its production is being sold to South Korea and Japan.
The company reported strong quarter earnings with profits up 60 percent on a yearly comparison because of higher domestic coal prices and lower cost increases. I expect these trends to continue; Yanzhou remains a buy.
There was a lot of speculation on the Internet in the days leading up to the IPO, led by publications like Taipan, that falsely indicated that US-based investors weren’t allowed to purchase Alibaba.com. If you followed my advice—that a good online broker would have no problem executing an order—you should now own Alibaba.com shares. (See the Nov. 2 issue of Silk, 1688 HK.)
Given the company’s high valuations, viewing it as a speculative play should be the right approach for now. But don’t underestimate its potential if the markets remain reasonable strong to the end of the year as I expect them to.
Alibaba.com is the new addition to the Silk Alternative Holdings Portfolio. Buy Alibaba.com.
Asia Still Leads
Asia remains at the forefront of the great economic transformation that is shifting the leadership of economic growth from the west to the east. Translating these implications to investment ideas, Asia—excluding Japan—is currently in a long-term bull market that commenced at the bottom of the Asian Crisis in 1998.Led by India and China, Asian economies have been growing as a whole by an average of 8.5 percent in the past five years, easily outperforming global growth.
Furthermore, Asia’s share of the global economy has grown to 31 percent in purchasing power parity (PPP) terms. Since Asia’s economic transformation is still in the early stages, and China’s urbanization ratio is about where Japan was pre-1940s, expect this number to continue to improve over time.
In addition, Asia ex-Japan is now the world’s biggest holder of foreign reserves, which at USD2.8 trillion, represent almost 50 percent of the world’s total. The expansion of global trade has also been very beneficial to the region since it now accounts for 20 percent of global merchandise exports.
As a result, Asia has been easily outperforming global markets, a process that started in earnest at the end of 2001 as the chart below demonstrates. The chart depicts Asia’s extremely strong market performance against the MSCI global markets index. Note: Data have been normalized for easy comparison—i.e., base equals 100.
In the current environment, all dips in Asian markets should be viewed as buying opportunities. (See the Oct. 10 issue of Silk, Buy the Dips.)
Source: Bloomberg
On Nov. 5, the Hong Kong market was down 5 percent after the Chinese Premier, Wen Jiabao, commented on the qualified domestic retail investor (QDRI) program that will allow mainland citizens to buy stocks in Hong Kong. Unfortunately, the comments were taken out of context, and a lot of people assumed that the Premier was indicating that the Chinese government is preparing to scrap the program.
But my understanding is that the government is working with financial regulators on the mainland and Hong Kong to implement the program to minimize shocks to the domestic financial markets and economy, the classic gradual approach of the Chinese government.
True, the Hong Kong market has run ahead of itself since the lows in August and was looking for some excuse to correct, but I still expect that the program will be implemented. Therefore, it will increase the liquidity of the market as more funds will be easily allowed to circulate.
The Hong Kong bull market still feeds off China’s strong earnings growth and global liquidity conditions that allow investors to buy one of the biggest growth stories of our time. A delay of the QRDI program will only prolong the bull market as investors anticipate the final outcome.
Portfolio Moves
Royal Dutch Shell (NYSE: RDS.A) was recommended here as a turnaround play in the big oil sector. The stock has performed well since it was added in the Silk portfolios at the end of March 2006, up around 43 percent. The story still has legs, but now is the time to book the profits.The Silk portfolios offer a good selection of energy related stocks that you could buy with the proceeds and continue to benefit from the energy bull market. Lukoil (Russia: LKOH, OTC: LUKOY), OAO Gazprom (Russia: GAZP, OTC: OGZPY), Sinopec (Hong Kong: 386, NYSE: SNP), and Yanzhou Coal (Hong Kong: 1171, NYSE: YZC) are the obvious candidates. Sell Royal Dutch Shell.
Company Updates
Switzerland-based ABB (Switzerland: ABBN, NYSE: ABB) reported great numbers with third-quarter profits up 86 percent. ABB is one of the companies that offer Silk portfolio exposure to the global infrastructure theme; it’s the world’s largest builder of electricity networks. See the Jan. 17 issue of Silk, Buying Infrastructure.The company generates 44 percent of its revenue from emerging markets and has benefited tremendously from growth in China and India. Upcoming project in these two countries will also benefit ABB in the future. China plans to invest USD125 billion in power plants and USD134 billion in power transmission and distribution in the next five years, and India’s commitment to bring power to 120,000 villages in the next five years will also benefit ABB’s operations.
Since a lot of developed economies (particularly the US) are planning to increase their power generation dramatically in the next decade, ABB is now in the middle of one of the most powerful investment trends of the future.
Under these conditions, the company will be able to grow earnings at very high rates and will attract more investor interest as it achieves success in this front. ABB remains a buy.
United Overseas Bank (Singapore: UOB, OTC: UOVEY) had an unexciting quarter to report on; earnings were down 14 percent for the quarter and up 8 percent on a year-over-year comparison. However, the company remains my favorite way for exposure to Singapore’s long-term economic success story, and I expect better performance in the next few quarters.
For Long-term investors United Overseas Bank’s moves beyond its home market are of bigger interest. The bank has increased exposure to Thailand and solidly grown Indonesia through outright acquisitions of local financial institutions (in Thailand) and participation in other banks (in Indonesia).
Of particular interest is its acquisition of 10 percent in Vietnam’s Southern Bank, one of the top banks in the country. It has been agreed that United Overseas Bank will purchase an additional 10 percent once regulators allow such an increase in foreign ownership. Because of Vietnam’s frontier economy status and extraordinary long-term economic growth potential, this move will prove a big positive to United Overseas Bank’s future growth. Buy United Overseas Bank.
Chunghwa Telecom (Taiwan: 2412, NYSE: CHT) continues to offer solid execution and predictability. Third quarter revenues were up 2 percent with profits up 8 percent on a yearly basis.
Broadband and 3G remain the main growth drivers, as the company continues to aggressively upgrade its broadband subscriptions, while 3G revenue continue to grow strongly as returns per user are 6 percent higher than those of 2G. The company’s 5.3 percent sustainable dividend yield makes it a good defensive portfolio holding. Buy Chunghwa Telecom.
Dr. Reddys Labs (NYSE:RDY) didn’t offer any surprises with its numbers. The company is my preferred way to get exposure to emerging global pharmaceutical companies, and the upside potential is big. The company continues to experience steady growth in its markets (US, Western Europe, Russia, India) while controlling costs by moving high-cost operations to India.
Since 60 percent of its sales are in overseas markets, the strong rupee has been a drawback. But good growth numbers (especially in the all important US market) have been able to smooth things out. The company has a strong research pipeline, focused in the areas of cancer, diabetes, cardiovascular, inflammation and bacterial infections.
Because of the stock’s weak performance this year, valuations remain very attractive, offering a good entry opportunity for the long-term investor. Buy Dr. Reddys Labs.
AU Optronics (Taiwan: 2409, NSYE: AUO) is Silk’s technology exposure. The most recent results were better than what the market was anticipating; the stock has been re-rating for sometime, taking its cue from strong cyclical upturn in the thin film transistor liquid crystal display (TFT LCD) industry. The stock’s performance gives credence to patient investors as the year-long wait since my original recommendation has produced a 50 percent return.
I expect further strength in the upcoming quarters. Also, management continues to deliver in its plan to reduce debt levels and has been anticipating a dividend increase because of the company’s improved balance sheet and good cash flows. Buy AU Optronics.
Keppel Corporation (Singapore: KEP; OTC: KPELY) remains operationally on track since it delivered a strong 23 gain in quarter profits. The company remains a double play on global (through its rig manufacturing and infrastructure divisions) and domestic (property division) economic growth. Its offshore divisions accounted for 54 percent of profits, and its property division tallied 21 percent.
Its infrastructure division has been a laggard in recent years, but new projects in the Middle East—where I expect strong economic growth to continue—are helping management to turn things around. One of the best quality companies around, Keppel Corporation remains a buy.
Mitsubishi Heavy Industries (Japan: 7011, OTC: MHVYF) reported strong first half numbers with earnings up 26 percent. Its order backlog was also strong, up 16 percent, on a yearly comparison.
Mitsubishi Heavy Industries is another company that offers infrastructure exposure. Its operations are concentrated in power systems (52 percent of profits), machinery (29 percent) and aerospace (13 percent). Mitsubishi Heavy Industries remains a buy.
Yanzhou Coal (Hong Kong: 1171, NYSE: YZC) is Silk’s play in the Chinese domestic coal market as two-thirds of the company’s sales are in the domestic market supplying Chinese power and steel companies. The rest of its production is being sold to South Korea and Japan.
The company reported strong quarter earnings with profits up 60 percent on a yearly comparison because of higher domestic coal prices and lower cost increases. I expect these trends to continue; Yanzhou remains a buy.
Fresh Money Buys
Because the investment process is constant, if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets (consult the Portfolio for details), in order (for both countries and sectors):- Singapore (banking, telecommunications, industrial)
- South Korea (electric power, banking)
- Hong Kong (banking, real estate, infrastructure, publishing)
- India (pharmaceuticals)
- China (consumer, coal, power, oil, water)
- Russia (telecommunications, energy)
- The Philippines (Telecommunications, Real Estate)
- Malaysia (ETF)
- Taiwan (technology, telecommunications)
- Europe (pharmaceuticals, industrials, communications equipment)
- Japan (banking, industrials)
- Macau