Abaci's Common Sense Investing

Yesterday I went to an investment seminar held by Quam. It was a slight disappointment that it lasted only an hour or maybe less, while it took me 1 hour of commuting time back and forth and some 20 minutes of waiting. Having said this, just one good investment idea would make all these troubles worthwhile.

The four sectors they have picked for 2007 are banks, automobiles, infrastructure construction, and ports/shipping. Banks are no longer bargains though they may still be good long term investments. I've mentioned some shipping plays already and ports are more expensive though consistent. So today I'd focus on the automobiles and infrastructure construction sectors. I'm only starting on these sectors so if you have any good ideas as to where or what to look, let me know.

Everyone knows about the China automobiles growth story so there's no repeating here. It's another battlefield over-crowded with domestic and foreign producers all trying to get a bigger slice of this growing pie. I used to like Denway despite I could not understand its accounts at all. All important financial information is condensed in one line as 'investment in an associate', although I think this structure had nothing to do with the management but rather the government's policy that forbids foreign majority ownership. I like the chance of Honda in China because of its success in North America and here in HK. However Denway is only a manufacturer so there's a cap in profit potential. Then I found out Dongfeng also produces automobiles for Honda, hence making Denway's identity confusing. That of Dongfeng is even more confusing as it also produces cars for Nissans, Peugeot, and now there's talks with Volvo too. The market though seems to like this blurred identity and has rewarded it with a higher valuation. Brilliance should have a good future with its JV with BMW but that is offset by its problems with its own brand luxury sedans. I don't know much about Qingling nor Isuzu other than that its profit is on a declining trend. Other the other hand there are pure domestic brands like Geely and Greatwall but I'm doubtful of their cars' quality and low price strategy over the long run. 'When the tide comes all boats shall rise', it may be the case here but I'd rather be waiting on the shore at the moment.

Take a step step and look at some ancillary companies. I think there's a listed company running Benz dealerships in China and Hong Kong. It may be a good proxy bet after further study. Norstar makes car brakes and has proven itself in the US replacement market. It's starting to develop the domestic market too. But it seems to have too much dealings with its owners. IPE claims itself to be an autopart supplier but the numbers suggest it's at least one or two years away. Weichai makes heavy truck engines and is technologically advanced with its cooperation with German counterparts in developing Euro IV environmental standard compliant engines. But it's price has advanced too far ahead. There may be some good companies in making windshields, tires, electronics, die casting moulds, or other autoparts, lying out there waiting to be uncovered. I'll just have to keep looking.

Infrastructure construction sector is heavily favored as under the latest China 5-year plan the transportation/logistics network is the focus of development. We'll see more roads, railways, bridges, ports, airports get built over the next 5 years. However it's hard find any bargain here. For constructors we have China Communication Construction and for traders we have CNBM. Both seem fully priced in right now but the Quam team still prefers CCC for its irreplaceable leader status. CIMH the infrastructure machinery maker is just as richly priced. China State Construction sounds similar to CCC but actually derives most businesses from HK and the international market. PYI is more a landlord than constructor with heavy investments in the Yangtze River Delta. There are numerous HK construction plays but I doubt they can make it successfully into the China market. I like Shui On Construction for its cement plants are in around Sichuan and the southwest which should benefit from the development of the neighbour 2nd tier cities. Anhui on the other hand is a bit pricey which according to Quam has a prospective p/e of over 20x. Guangshen Railway, pricey, Zhuzhou CSR Times, crazy.

This post is not very organized and coherent, but it's intended as a brainstorming session to invite views from readers.