FALLS CHURCH, Va.–There’s been a lot of speculation of late that May’s the month the global markets will sell off once again, which is what happened at this time last year. Although I don’t profess knowledge on this issue, you can easily see the rationale behind this assessment, especially if the selloff from late February to early March is viewed as a warning signal to something bigger.

I’m not prepared yet to sit firmly with the bears on that one. But as I’ve noted here on numerous occasions, we can’t rule out another selloff, especially if market participants decide to reassess risk levels because of loss of confidence. This can happen for many reasons; I mentioned some of the more important ones last month. (See SRI, 28 March 2007, The Great Unknowns.)

It should be understood that, in such an event, emerging markets will overshoot on the downside as investors try to sell out while taking profits. And these are the markets where serious profits can be booked.

When it comes to SRI, my working assumption remains that long-term readers have booked profits by now and their holdings are confined to Portfolio recommendations–at least when it comes to non-US-based investments. Furthermore, readers should build new positions by following the Fresh Money Buys list below.

New Recommendation

Infrastructure remains one of the main investment themes. (See SRI, 17 January 2007, Buying Infrastructure.) When it comes to emerging markets, you should expect a lot of growth in this area for years to come–economic cycles notwithstanding. Today’s recommendation is–among other things–a play on this theme.

Hopewell Holdings (OTC: HOWWY) is a Hong Kong-based conglomerate. It engages in toll road operations, development and investment properties, and power plant projects in Hong Kong, Guangzhou (mainland China) and Macau. It runs its toll roads operations via a 73 percent stake in Hopewell Highway Infrastructure, which was spun off from the company in 2003. The company also runs hotels and provides hotel management and hospitality-related services.

The company was one of the main property developers in Hong Kong in the 1970s and ’80s and is currently making a comeback on the back of its strengthened balance sheet. Hopewell’s fortunes started changing in 2004, mainly because of its businesses in the Pearl River Delta (PRD) region and the gradual disposal of nonprofitable assets. PRD is one of the most economically vibrant regions in China, accounting for almost 30 percent of the country’s trading activity while it receives 20 percent of the foreign direct investment (FDI) flowing to the country.

Hopewell will benefit from the Guangzhou government’s USD130 economic development budget. The budget includes plans for the expansion of total highway length from 2,000 miles to 3,000 miles and the construction of bridges linking Hong Kong, Zhuhai (Guangzhou) and Macau, as well as other infrastucture improvements.

In addition, Hopewell is involved in residential real estate in Macau and Hong Kong, where new residential and commercial projects are underway.

Given its solid business moves, Hopewell now has a debt-free balance sheet (from a 77 percent debt-to-equity gearing in 2001) and a net cash position of USD470 million. Consequently, the company’s options are quite open.

For starters, it has the financial muscle to easily finance new projects (e.g., highway infrastructure, property). Given its unleveraged balance sheet, there’s scope to easily increase its debt-to-equity gearing without affecting its financial status and free up more cash for investing purposes. At the same time, it can easily increase dividends–as it has done in the past–to return more money to shareholders.

Note that Hopewell is a play on the China-Hong Kong-Macau economic growth story and will be affected accordingly by the region’s economic cycle. The company is being added to the Alternative Holdings Portfolio because it offers additional exposure to infrastructure and Hong Kong, covered in the Long-Term Holdings Portfolio by ABB, Cheung Kong, Mitsubishi Heavy Industries and Keppel Corp.

Buy Hopewell Holdings; one American Depositary Receipt represents one ordinary share.

Hopewell Business Breakdown
Sector	Percentage (%)
Highways	41
Investment Properties	38
Land Bank	15
Power Plant	3
Property Development	3

Source: Hopewell Holdings, SRI

Earnings

The companies recommended in the SRI Portfolios have been reporting overall good earnings. Here’s a look at some that have already reported. Note Alternative Holdings Portfolio companies will be covered next week.

ABB’s earnings were strong at 18 percent above consensus. Margins also came in much better than expected, while order growth remains a respectable 20 percent. The company’s revenue remains solid, and there’s a 34 percent growth in order backlog–one of the strongest in the industry. Management hasn’t revealed its growth assessment for the rest of the year, but it’s expected to do so sometime this summer.

To refresh your memory, ABB is a global provider of power and automation technologies. The company operates five divisions: Power Products, Power Systems, Automation Products, Process Automation and Robotics.

ABB offers direct exposure to India through its subsidiary ABB India, a leading player in the Indian power and automation technology sectors. As India increases its energy generation capacity, it will also invest substantially in transmission and distribution (T&D) infrastructure. ABB is the world leader in transmission grids, and it will benefit tremendously from changes taking place in India and other emerging markets; the country now loses 32 percent of its energy during T&D and must improve.

Cheung Kong’s profits rose 29 percent, with almost all divisions recording profit growth. Property sales in particular showed profits jumping 69 percent as prices have been rising in the region. The company also raised its dividends by 10 percent.

Cheung Kong continues to be the largest developer in Hong Kong with a land bank of more than 16 million square feet. Because of some low-cost land bank acquisition, the company probably is one of the few developers that could see improvement in margins in the next couple of years.

In mainland China, the company has 32 projects in 14 cities under development. I expect that they will contribute to its growth substantially in the future.

Taiwan-based Chunghwa Telecom continues to deliver solid, although not spectacular, numbers. This isn’t a problem; the company is one of the less volatile SRI picks offering good dividends.

Chunghwa has been working toward enhancing cash payments to stockholders; expect an extra cash payout soon. As a dividend play in the Portfolio, the company has been delivering; I expected it to continue doing so.

Hengan International showed 50 percent profit growth despite strong competition from foreign companies. The company’s margins remain strong at 16 percent, one of the highest among Chinese branded consumer manufacturers.

Established in 1985, Hengan is the largest sanitary napkin manufacturer and the second-largest disposable baby diaper manufacturer in China; it’s also a leading producer of high-end tissues. It started making sanitary napkins in China in the early ’90s, effectively creating the market, and built a strong brand name and distribution network.

The main growth engine of the company is its diaper division. Diaper demand is growing strongly, driven by demographic change and rising living standards. Although disposable diapers have been available for 20 years in China, industry growth has picked up to 40 percent–60 percent in Hengan’s case–during the last couple years as young parents in urban areas see their incomes rising.

Margins are expected to remain high because of improvement in diapers’ and tissues’ profit margins. In addition, the company is taking advantage of the renmimbi (RMB) appreciation as 60 percent of its materials are paid off in US dollars. Hengan’s solid execution and strengthening brand value also remain extremely important because investors realize that this is another reason for the company to command a premium.

India-based ICICI Bank has been one of the main vehicles I’ve used to capitalize on the strong economic growth in India. As I expected, the latest results weren’t good, with earnings declining by 9 percent on a quarterly basis.

The main reason for this has been the government’s effort to slow the overheating retail lending sector, which has been growing upward of 30 percent. As a result, retail loans slowed down considerably while credit cost rose. It’s a good long-term bet, but I expect ICICI to experience more headwinds before the next leg up.

Keppel Corp had an excellent quarter, reporting strong earnings. Its property segment earnings were a big contributor, with 44 percent growth on a quarterly basis and 71 percent in year-over-year comparison. The property business main drivers were rental growth and residential property sales.

Keppel is the most-diversified conglomerate in Singapore, with interests in offshore and marine (O&M, 60 percent of earnings), property (10 percent), infrastructure (10 percent) and other investments (20 percent). O&M will continue to do well as long as oil prices remain above USD45 per barrel, as I expect them to. Residential property prices and office rentals in Singapore will likely remain on an uptrend because of increasing immigration and shortage of office space. Infrastructure projects in Singapore, China and the Middle East will help the division turn profits and contribute more than 10 percent of earnings this year.

Note that Keppel completed a 2-for-1 share split today.

Japan-based Mitsubishi Heavy Industries (MHI) reported good numbers, with sales growing 10 percent year over year and operating profits by 54 percent. The global increase in spending on infrastructure has helped MHI tremendously. The company is in the middle of earnings recovery and should continue on this path, although investors should expect slow improvement.

Among its major businesses, in the aerospace segment, orders for aircraft from Boeing are strong and increasing demand for midsize jets with low fuel costs continue to provide a good push. In the power systems segment, the company is making investments in highly efficient gas turbine and thermal power plants. There’s also strong growth in wind-power operations, as well as nuclear power reactors area that MHI is a major player.

Finally, the company is involved in the defense industry. MHI manufactures the Patriot Advanced Capability 3 (PAC-3) missiles that are used to intercept and destroy incoming missiles. Orders have also been growing for terrestrial launch facilities of the missiles as well. PAC-3s are manufactured under license from Lockheed Martin.

The company also builds airplanes, such as Japan’s F-2 fighters, and ships, including destroyers. Sales to Japan Self-Defense Forces amount to more than $2 billion annually.

Fresh Money Buys

If you’d like to add to your positions in Portfolio recommendations or allocate new funds, focus on the following markets, in order (for both countries and sectors): South Korea, Malaysia, Russia (telecommunications, energy), Singapore (telecommunications, banking, industrial), Europe (pharmaceuticals, oil, industrials, communications equipment, media), Hong Kong (real estate, publishing, infrastructure), Japan (industrials, banking), India (pharmaceutical, banking), China (consumer, power, oil), Taiwan (telecommunications, technology) and Macau.