There’s still more profits coming on the long side this year–but make sure you hedge these long positions. I’ll also introduce a couple shorts at an opportune time in order to enhance the hedging positions.

Singapore-based industrial Keppel Corp (OTC: KPELY) reported a 4 percent rise in first quarter profits. The worrisome issue: a 9 percent decline in its offshore and marine (O&M) division’s revenues. O&M contributes 50 percent of Keppel’s earnings. Management has projected a tough year for 2008 even though the property, infrastructure and investment divisions showed strong profits.

In the beginning of the year, I recommended reducing your exposure to cyclical sectors and companies such as Keppel Corp. See Silk, 23 January 2008, The Fed is Your Friend.

I’m still fond of the company; it’s a great long-term holding in any portfolio but could be hit more if things turn uglier. This is the reason Singapore dropped down the list of Fresh Money Buys in the beginning of the year. Those of you with well-diversified portfolios should be more relaxed, especially if you’ve been able to take some profits of the table during the past month.  

Keppel will likely have a rougher year than a lot of investors expected three months ago. But now it’s time to start gaining some exposure to one of the best run companies in the world. Buy Keppel Corp.

Bank of China Hong Kong (Hong Kong: 2388, OTC: BHKLY, BOCHK) reported strong first quarter 2008 numbers, especially in year-over-year comparison. Operating profits were up 28 percent with loans and credit card business leading the way. 

The bank has also reduced its subprime exposure to only 2 percent of equity, a move that essentially transforms the subprime issue into “a thing of the past.” After all, BOCHK’s exposure was relatively small from the start.

BOCHK is the second-largest bank in Hong Kong in terms of deposits and loans. It has a customer base of around 2.5 million retail customers (around 40 percent of Hong Kong’s population). In China, BOCHK operates 14 branches and can make use of its parent’s 13,000 branches to serve the rising consumer demand for cross-border banking services.

A long-term portfolio holding, BOCHK remains one of my favorite banks in Asia and should fair relatively well even during a weak market. Buy Bank of China Hong Kong.

Singapore-based United Overseas Bank (OTC: UOVEY) reported a 2 percent increase in year-over-year net profits, driven largely by 19 percent growth in loans. The construction industry led the way–up 46 percent–and housing loans followed close behind with a 30 percent increase. From its overseas operations, Malaysia reported the best numbers, up 22 percent.

Expect a slowdown in loans in the second half of the year because the global economic malaise will also affect Singapore. However, United Overseas Bank still trades at reasonable valuations of 1.6 times book and a price-to-earnings of 13 times.

Finally, United Overseas Bank has managed costs, a positive during this slowing economic cycle.

United Overseas Bank, founded in 1935, is one of the largest banks in Singapore, with activities ranging from retail to investment banking. It also has operations in Thailand, Indonesia and Malaysia. The Malaysian franchise is the largest foreign banking franchise in the country with 40 branches. A good long-term holding, United Overseas Bank remains a buy.

Korea-based Shinhan Financial (Korea: 055550, NYSE: SHG) continues to deliver solid operational numbers and has also written off part of its collateralized debt obligation exposure. Shinhan increased loans by 5.7 percent quarter-over-quarter while reducing costs and expenses, keeping its lending quality high.

Shinhan is a holding company that provides a full range of financial services. Its main operations include banking, credit cards, brokerage, trust banking, insurance and asset management for individuals, businesses and other financial institutions.

Even though the South Korean economic outlook is quite mundane, the economy could benefit from the changes that the new government is trying to implement. Shinhan remains a value play and should benefit from the long-awaited changes in the South Korean financial sector. Buy Shinhan Financial.

As I recently noted, banks are one of my favorite sectors this year because they still offer good valuation support and will be the longer-term beneficiaries of Asia’s economic growth story. (See Silk, 23 April 2008, The Downside).

Currently, my order of preference for banks recommended in the Silk portfolios is as follows: Bank of China Hong Kong, Mitsubishi UFJ Financial Group (Japan: 8306, NYSE: MTU), United Overseas Bank and Shinhan Financial.

Philippine Long Distance Telephone (NYSE: PHI, PLDT) reported solid first quarter numbers as expected. Revenues rose by 6 percent and earnings gained 11 percent year-over-year as wireless led the way.

I favor this stockholder-friendly company because of the great earnings visibility that it offers and the low danger from competition, especially in the high-growth cellular sector in which the company owns 60 percent of the market. 

As the main telecom company in the country, PLDT also offers a sustainable 5 percent dividend yield and a yearly special cash distribution on top. Notice that the Philippines’ stock market is quite volatile, one of the underperformers this year. This adds to the risks for the company, but that exposure in this market will pay off, and PLDT is the best way to gain it. Buy Philippine Long Distance Telephone.

Today I’m revisiting Silk Volatility System (SVS) I introduced a few weeks ago. See Silk, 16 April 2008, A Bridge Across the Straits.

The SVS is a simple way to identify which Portfolio stocks are more volatile than others. The system is based on beta calculations, and each stock is compared to the market in the region it calls home. 

A stock with a beta of “1” or higher is categorized as volatile. A stock with a beta below “1” is less volatile. In the portfolio tables, you’ll see the notation “V” next to each stock with a beta greater than 1.

The most volatile stocks in the Long-Term Portfolio are: 

• China Infrastructure Machinery (Hong Kong: 3339, OTC: CIMHF)
• China Mobile (Hong Kong: 941, NYSE: CHL)
• Keppel Corp (OTC: KPELY)
• Mobile TeleSystems (NYSE: MBT)
• Yanzhou Coal (Hong Kong: 1171, NYSE: YZC)

The most volatile stocks in the Alternative Holdings Portfolio are:

• Alibaba.com (Hong Kong: 1688, OTC: ALBCF)
• Ayala Corp (OTC: AYYLF)
• Lukoil (OTC: LUKOY)
• Melco PBL Entertainment (NSDQ: MPEL)
• Sinopec (Hong Kong: 386, NYSE: SNP)
• Vimpel-Communications (NYSE: VIP)

Cambodia-based Naga Corp (Hong Kong: 3918, OTC: NGCRF) merits special mention. Although Naga has a low beta compared to the rest of the region, it does carry the risk inherent in a truly emerging market.

It’s the only company investors can own in Cambodia, and given this country’s turbulent political past and the fact that it’s still in its early stages of economic development, you should be aware of the risks such as investment entails.

Naga remains the perfect way to get exposure to an exciting, pure emerging market opportunity in which the rewards can be substantial. See Silk, 5 March 2008, Holiday in Cambodia, for an in-depth discussion. The stock has been flat since I first recommended it, but it’s rallied 64 percent since the March lows. Naga Corp remains a buy.

As always, I prefer the local shares–when we can get them–to the over-the-counter (OTC) listing. And because Hong Kong is easily tradable through serious brokers in the US, I strongly recommend buying the stock locally.

The investment process is constant. So 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, in order (for both countries and sectors). Consult the Portfolio tables for details.

• Russia (energy, telecommunications)
• Hong Kong (banking, real estate, infrastructure)
• India (pharmaceuticals)
• Philippines (telecommunications, real estate)
• Singapore (banking, telecommunications, industrial)
• China (consumer, telecommunications, machinery, oil, e-commerce, coal)
• Japan (banking)
• Taiwan (ETF)
• South Korea (banking)
• Cambodia (casino/hotels)
• Macau (casino/hotels)