Chinese Investments

Chinese Investments: How To Safely Make 10 Times What You Risk

By Dr. Steve Sjuggerud, President, Investment U
Thursday, March 4, 2004: Issue #317

“So you mean that for a total cost of 1%, I will make 10% if China revalues by 10%?”

“Yes, that’s correct.”

That’s the conversation I had with Everbank this morning about their special China deposits.

My call to Everbank had a special urgency today as even the most mainstream brokers are now predicting that China will revalue its currency by the end of this year. For example, Merrill Lynch just released a major research report this week, saying that China will revalue its currency by 10% by the end of 2004.

As Francesco Guerrera wrote in this morning’s Financial Times: “China has been under pressure for more than a year to revalue its currency. U.S. politicians complain that cheap Chinese exports compete unfairly with U.S. products and put Americans out of work.”

It seems like a no-brainer

What’s Happening In China Right Now

“By investing in Chinese assets ahead of convertibility we should be able to double our investment before trading in the yuan even starts.”
Porter Stansberry, July 1, 2003, in his China Strategy Report

I’ve got to hand it to my good friend Porter Stansberry. He got it exactly right He saw what was happening in China a year ago, and he immediately started the China Strategy Report. He called it right on China and he doubled his readers’ money in less than a year on his recommended China-related stocks.

So I gave Porter a call this morning to get his thoughts. And he directed me to the conclusion of the latest issue of his China Strategy Report:

“Events in China are moving quickly. As a result, companies operating in China have seen the discount afforded to their shares, relative to Western companies, decrease.

“For example, in my original China Strategy Report, I detailed how cheaply the shares of PetroChina were trading for, compared to ExxonMobil:

“In 2002 PetroChina made $10 billion in cash from operations. But its market value is only 5 times that amount – $49 billion. Its market price is about one-fifth of its leading global competitor, ExxonMobil, which sells for $249 billion. Strictly on an earnings basis, PetroChina is one of the cheapest high-quality stocks in the world: it trades at 9 times last year’s $5.3 billion in profits. It’s valued at a discount to assets ($55 billion) and at only a slight premium to net asset value ($35 billion). If you’re only going to buy one Chinese stock, this is the one to buy.”

“Today after its market has increased by more than $45 billion PetroChina is no longer the screaming bargain it was six months ago. There’s still a slight discount but it’s not a huge difference like it used to be.

“Thus, I think we’ve reached the point in our strategy to sit and wait for yuan convertibility. I don’t think there’s much more profit to be made in buying these stocks for capital gain. Of course, they do pay out nice, rich dividends, so, provided the shares do not fall more than 25% from their all-time highs, I think most investors will be happy to hold these stocks

“To summarize I recommend you continue to hold these stocks while we wait for more definite signs of yuan convertibility. At some point in the future, perhaps this year, we’ll sell these shares and swap these assets for yuan; most likely via an Everbank yuan cash account.”

It looks like Porter and I are on the same page here

While the China stocks may be near the end of their run, there is what appears to be a certain trade to make and it’ll cost you 1% (half-a-percent in, and half-a-percent out). You buy Everbank’s Chinese currency account and hold it for a year – or until the Chinese currency is revalued.

The revaluation may be more or less than 10%, of course. But it should be within a few points of 10%. And your “cost” is 1%.

There is no guarantee that China’s revaluation will happen within 12 months, of course. But as Porter told me on the phone, some analysts seriously believe it may happen as soon as this month.

A Great Play on China, with a Risk-Reward Ratio of 1-to-10

There are very few investments where your potential reward is as much as 10 times your risk. But this may well be one of them, as your risk is 1% and your reward should be somewhere around 10%.

I’d suggest learning all you can about China’s coming currency revaluation, contacting Everbank for more information on its China product, and seriously considering moving some cash (that’s earning you 1% if you hold it in savings) into a position where you can risk losing 1% to make 10%

Good investing,

Steve

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