Insights and Thoughts from Dorfman Value Investments
John Dorfman writes a syndicated column that appears weekly in Forbes.com, GuruFocus.com, Ohio.com, the Omaha World Herald, the Pittsburgh Tribune Review and the Virginian Pilot. In it, he tries to provide original, profitable stock ideas for readers. In contrast to almost all other investment columnists, he systematically reports on past results, both good and bad.
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Posted: February 26, 2020
February 25, 2018 (Maple Hill Syndicate) – Sir John Templeton, one of the greatest investors of the 20th century, famously said you should invest “at the point of maximum pessimism.”
At various points in his career, he did that in the United States, in Japan, and in New Zealand.
Now, I think investors have the chance to do something similar in China.
Chinese stocks are on most investors’ hate list these days. The Covid-19 virus is wreaking havoc in China, the trade war with the United States is incompletely resolved, and citizens of Hong Kong are protesting Beijing’s governance.
On top of that, China’s government is authoritarian, its economy has slowed from the torrid pace of recent years, and it has more than its share of accounting scandals.
Why, then, would a serious investor be interested in China? For many reasons.
To start with, Chinese stocks are cheap compared with those in most other countries – just as Japan’s were in the 1960s.
Second, China has the second largest gross domestic product in the world – about $14 trillion, behind only the U.S.’s $21 trillion. (Japan is third at $5.1 trillion, Germany fourth at $3.9 trillion.)
Third, the Chinese government is being forced by the Covid-19 epidemic to stimulate the country’s economy vigorously.
One Chinese equity that looks good to me now is Anhui Conch Cement Co. Ltd. (traded in the U.S. under the symbol AHCHY). Cement is need in all industrial countries, and more so in China, which is developing massive infrastructure.
Anhui Conch has very little debt, and more cash than debt. Its stock trades for a down-to-earth multiple, eight times earnings. And its return on stockholders’ equity last fiscal year was 28%, which is extraordinarily high.
For the past ten years, Anhui Conch has shown revenue growth of about 14% per year.
For 14 times earnings, you can buy Sino Biopharmaceutical Ltd. (SBHMY), one of the larger drug companies in China. Despite its name, it is not purely a biotech company; it also sells traditional Chinese medicines and generic drugs.
Sino Biopharmaceutical has notched a profit in each of the past 15 years, and has earned 20% or better on stockholders’ equity seven years in a row. One risk factor is government controls on drug pricing. Such controls can be imposed faster and more stringently in China than in the U.S.
The company has a diverse stable of drugs, strengthened recently by a couple of new cancer drugs. It has a large sales force and services about 90% of China’s hospitals.
China Construction Bank
China Construction Bank Corp. (CICHY) is one of the four big government-controlled banks in China. As its name implies, it concentrates on financing infrastructure projects and buildings (especially urban housing).
Though its profitability figures are usually smaller than those of Sino Biopharmaceutical, it, too, has 15 straight years of profits. The government’s controlling ownership probably makes the bank less innovative than it would be if it were private, but does provide some assurance of stability.
Daqo New Energy
More speculative is Daqo New Energy Corp. (DQ), a maker of silicon for solar panels. After recent expansion and modernization, the company is a very low-cost producer – I believe, the world’s lowest.
Solar energy is growing fast, both in China and worldwide. Admittedly, its growth has been goosed by subsidies and favorable regulation. Given the twin problems of pollution and global warming, I think the benign regulatory environment will continue.
Daqo has been publicly traded for a little over a decade. It posted losses in 2012 and 2013, and had a couple of loss quarters recently.
A risk with this stock is that it has doubled in the past three months. Nothing goes up forever. However, I am heartened that the stock sells for only eight times estimated 2020 earnings.
The Chinese government has changed its mind from time to time about how much solar-panel production it wants. That directly affects Daqo’s customers, and in turn Daqo itself. I believe a shake-out in the industry is in progress, but I am confident Daqo will do well, given its low production cost.
The Path Forward
I can’t predict the course of the Covid-19 virus epidemic – or whether it will become a pandemic. There’s little question that it could clip China’s economic growth for at least a couple of quarters, and probably more.
My recommendations in today’s column are for investors who have a time horizon of at least a year, a preferably two years. In that time frame, I think investors who take a bold, contrarian stance now will be glad they did.
Disclosure: I own China Construction Bank personally and for most of my clients. I own Daqo personally and for a few clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.