Newsletter March 2006

Earnings Season Is On: How are you doing?   I can’t help but quote from our February Newsletter, page 4 last paragraph. “Based on our latest field trip to China, Chinavestor.com expects The9 Ltd. (NCTY) to report a nice surprise. On the other hand, we did not see much activity of Shanda’s line of products and expect the battled  game and home entertainment developer to slip.” End of quote. So when Shanda released earnings after the close on February 27th, disappointing news did not surprise us. China’s top online game operator said it swung to a quarterly loss and missed Wall Street revenue targets as online game sales weakened, sending its shares down 19 percent after hours. In contrast, rival The 9 Ltd. recently reported a more than tenfold year-on-year gain in fourth-quarter profit, largely on the strength of “World of Warcraft”, the blockbuster online game marketed by a unit of Vivendi Universal S.A., which The9 hosts in China. And just to emphasize the importance of getting Shanda right, we have to remind our readers that to get the industry leader right is the key to understanding the whole sector. Besides the online gaming sector, Chinavestor covers over fifty U.S. listed Chinese companies. Chinavestor published seventeen research reports after third quarter earnings releases, NYSE and Nasdaq names combined. How do we measure up? We are proud to announce that thirteen reports, out of the seventeen total, predicted three months forward stock price direction right. When we recommended BUY, the stock price moved actually higher or when we said SELL, the stock price (SINA for example)  went down. The strength of our analysis is further amplified by the fact that eight out of thirteen predictions got the three months forward price range within our target price. (see last column of table below) In addition to these outstanding results, we find great satisfaction in the fact that even though we were conservative in our analysis and ranked Sohu.com (SOHU), Sinopec (SNP), NetEase (NTES), Ctrip.com (CTRP), and CNOOC (CEO) BUY only, strong earnings lifted them beyond our expectations. So if you had listened to our analysis when we gave these stocks BUY ratings, you would be very well off by now. And we have additional good news for Chinavestor subscribers. We have updated the format of our Stock Analysis while keeping the depth of the analysis the same. This sample image is an actual screen shot of the first page of our latest Sina Corp. (SINA) analysis. The new format consists of eight pages, gives you insight into net income and earnings estimates, valuation, key Income Statement, Cash Flow and Balance Sheet data, competitor analysis, future outlook and more. Hope you will find great value in all our efforts to give you additional market intelligence.   Mainland Exchanges Poised to Explode   China may be the hottest economic growth story in the region, but when it comes to attracting fund flows to domestically listed shares, India is still ahead. But China is catching up. And while China has seen a strong pickup in fund flows in the last two months, flows to the mainland are still much less than those to India, because it has established vehicles for investment. Anecdotally, India is estimated to get billions of dollars from Europe while China gets less than a third of that, if Hong Kong-listed or H shares are excluded. Still, that could change, as economic growth figures continue to improve in China and as the government grants additional investment quotas to  foreigners. Meanwhile stock markets listen. China’s Shanghai and Shenzhen markets fell to seven year lows, losing 8% and 12% respectively in 2005,  but are up 18% and 17%, respectively, so far in 2006. The Hang Seng China Enterprises Index of H-shares, or Hong Kong listed shares issued by a mainland-registered company, is up over 20 percent so far this year, but most fund managers already have H shares in their portfolios. And China’s regulators are nurturing the growth. According to figures released in early February from China’s State Administration of Foreign Exchange, by the end of 2005, China had approved 32 qualified foreign institutional investors to invest a total of $5.645 billion in yuan-denominated shares and bonds. In January to November 2005, QFIIs received investment quotas totaling $2.07 billion. Besides money flows into dedicated China country funds, foreign direct investment (FDI) is pouring into the mainland. FDI into China rose in January 11 percent from a year earlier, to $4.55 billion, as efforts by overseas firms to tap the country’s cheap labor and booming consumer market showed no sign of weakening. The figure became public on the website of the Commerce Ministry. (www.mofcom.gov.cn).  Contracted FDI has risen much faster than actual FDI in recent years. In all of 2005, China drew $60.3 billion, just shy of the 2004 record of $60.6 billion. And Hong Kong stock market regulators pay attention to this double pay of fund flows and FDI. They believe that in long term, Chinese companies have much better prospects to grow earnings, that’s why they include more and more Chinese shares in the index, to keep it going up. Index compiler HSI services said in mid February it’s examining a plan that will allow mainland-incorporated companies, known as H-shares, to join the Hang Seng under certain circumstances. The challenge opens the door to companies with listed A shares on the mainland and H shares listed in Hong Kong to be eligible for inclusion—first in the 37-year history of the index.  H shares have traditionally been excluded because they aren’t entirely free-tradable. Among the first line to join the index is China Construction Bank (HK:0939), the mainland’s third largest commercial lender which has market capitalization of around HK$740 billion ($100 billion). The bank completed its shares reform prior to listing in Hong Kong in October, and now ranks among the top ten most actively traded shares daily. Other possible candidates, which fulfill the share-reform requirements,  include Angang New Steel (HK:0347), dry bulk-shipper China Shipping Development (HK:1138) and telecommunications equipment manufacturer ZTE Corp. (HK:0763).   The 33-member Hang Seng Index has traditionally been dominated by big banks, including the likes of HSBC Holdings (HK:5) and property companies. Mainland firms such as CNOOC Ltd. (HK:0883) (NYSE:CEO) and China Mobile (HK:0941) (NYSE:CHL) are already members of the Hang Seng, but they are incorporated abroad and conform to different legal and regulatory structures. Broadening the participation of mainland enterprises on the Hang Seng is believed to be an important step in keeping the index relevant, given recent trading activity which has seen fund flows bypass Hong Kong-focused stocks and target direct China plays. And Shanghai is getting ready to the change. Around this time the next year, the Shanghai Stock Exchange is expected to unveil one of the world’s most powerful trading systems, capable of handling an array of financial products such as options, index futures and other derivatives. The new trading system is the final—and most significant—part of a technological upgrade at the SSE that has been under way for several years. The system is reportedly robust enough to handle 16,000 trades a second. That is even more than the 13,000 trades a second the NYSE says its systems can handle over a sustained period, even after more than tripling of capacity in the past three years. In the future new China listings may bypass Hong Kong and head directly to Shanghai, diminishing the relevance of the territory as a financial capital. Are you prepared?   Energy Landscape is Changing. Who wins?   China is seeking technologies to ensure stable energy supplies, a top priority, a senior government official said late February. China, seeking oil and gas to fuel its booming economy amid stagnant production at home, has been snapping up energy resources in places as far as Venezuela, Kazakhstan, Nigeria and Australia. Besides fossil fuels to burn, China announced plans to increase its reliance on nuclear energy. Nuclear fusion, which replicates the sun’s power source by colliding atoms at extremely high temperatures and pressure inside a reactor, is expected one day to  generate endless, cheap energy without greenhouse gas emissions and with only low levels of radioactive waste. Embarking on an aggressive expansion of nuclear power, China has announced plans to add 40 new nuclear generators by 2020, raising the share of electricity generated by atomic power to 6 percent of the total from the current 2 percent. The aim is to reduce reliance on heavily polluting coal, which is used to generate two-thirds of the county’s electricity. Most of the nuclear facilities so far are expansions of existing facilitates or new projects in eastern and southern coastal areas, where coal is relatively expensive.  The country’s newest nuclear power plant, Tianwan station north of Shanghai, started generating electricity in October and is due to begin operations by the end of this year, with an eventual capacity of 60-70 billion kilowatt hours a year. The problem became evident when China first reported failures to meet power demand in 2000 and the situation deteriorated steadily. In 2004, 24 of China’s 31 provinces and regions suffered outages. Many major power plants had run low on coal supplies due to bottlenecks in the industry’s over-burdened transport networks and soaring demand. On the supply side, the situation is now gradually being relieved, with a total installed capacity of 750 gigawatts by 2010, up from 500 gigawatts late last year. As a result, China expects its seemingly perennial energy shortages to end, only to risk facing the opposite problem of having too much power-generating capacity. There are signs that power producers are getting jittery, lobbying for the right to price their products higher. They are currently caught in a stand-off with coal miners over how much they should pay for the fuel this year, and want to raise the price they get for their electricity. Now, this situation creates opportunity for intelligent investors. Beijing has freed prices for coal used in power generation from this year. So far generators absorbed about 70 percent of increases in fuel costs. Should the tide change, power companies are poised to report strong results. To access latest Newsletter and other research content, please register!