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“Project H” part two — plays on the “Hidden” Hong Kong Market

Checking up on some more stock picks teased by Asia Alpha Advisory

By Travis Johnson, Stock Gumshoe, December 20, 2016

Yesterday I started looking through the first pitch from Stansberry alum Kim Iskyan as he launches his Truewealth publishing and Alpha Asia Advisory newsletter, and today I’m following through to look at the other stocks he pitched.

Part one is here if you’d like to start at the beginning — the most full-throated bit of the promo was his pitch about Chinese tourism and air travel increasing, which led into his hinting about a favorite Chinese airline stock… that turned out to be Air China, but you can see the details here.

Today it’s two other stocks, both also Hong Kong-listed stocks that are large and meaningful players in the domestic Chinese economy.

To catch you up a little, part of Iskyan’s spiel is based on the fact that Hong Kong “blue chip” stocks (sometimes called “red chips” — both those terms are mine, not his) are often discounted in comparison to the shares of the same company that also trade in the “regular” Chinese stock market…

“The stocks we’re targeting are traded on a ‘hidden’ Hong Kong market.

“I say ‘hidden’, because this market is about as far from mainstream investors’ radars as you can get.

“In 1993, some of the most powerful companies in Asia started listing their stocks on this market as well as their local exchanges.

“They did this because they wanted to attract international investors…and at that time their local exchange did not allow foreigners access….

“They expected demand for their shares to quickly match prices on their hard-to-access local exchanges.

“But… international investors never really caught on.

“Instead, a dual market – often involving a big price gap – developed.”

I’m not sure I agree with the reasons for the Hong Kong discount — money in mainland China is largely trapped (though to a lesser degree than was true even a couple years ago), and Chinese investors can often only trade in their domestic stock market, not in Hong Kong or Singapore or Japan or New York. So I’d point out that to some degree, at least, part of the discount is because international investors think those companies are less valuable than the “trapped” domestic Chinese investors believe… perhaps because those international investors have more stocks to choose from.

Markets that don’t have free and easy arbitrage opportunities don’t necessarily have equal pricing — a stock that’s listed in both Canada and the US will almost always trade at almost exactly the same price in both markets, adjusted for currency exchange rates, because big banks can easily buy ten million shares in Canada and sell those shares in the US to close a gap of even a few cents and make some quick money… but that’s not the case in markets that don’t allow free and easy access to all. It’s not the Hong Kong market that’s the anomaly, necessarily, it could be that the premium pricing on the domestic market in Shanghai or Shenzhen is the anomaly.

But anyway, moving on to our specific ideas — what are the other Hong Kong stocks Iskyan likes? Clues, please!

“‘Project H’ Pick #2:

“An 86% gain from a $250 billion company? You’ve probably never heard of it… until NOW….

“You get the stability and cash reserves of a huge company, but the growth potential of a much smaller company….

“This stock pick is one of the 15 largest companies in the world and operates in the exciting and growing field of mobile technology.

“The company has over 800,000,000 customers (no, that’s not a typo… that’s 800 million).

“It generates more than $100 billion a year in revenue.

“It has $67 billion in cash reserves…

“Virtually zero debt…

“And it has a huge technological head start over its two biggest competitors….

“So as the remainder of this company’s 800-million strong user base moves across to the 4G network, expect to see their $100 billion annual revenue explode even HIGHER….

“If you buy today, I’m convinced you could double your money in the next 24 months.”

“Could” is so much more flexible than “will,” isn’t it? I could win the lottery this month, but more likely I will not. Lawyers who have to review ads from newsletters to make sure they’re not overpromising or getting themselves in trouble love words like “could” and “might” and “may”… the squishier the definition, the better.

This, then, pretty much has to be China Mobile, which is listed in Hong Kong at ticker 941 but also trades in the US as an ADR at ticker CHL (1 CHL share equals 5 HK 941 shares). There’s no pricing discrepancy between the US and Hong Kong to speak of, other than the fact that daily moves may not be reflected precisely because the two markets are never open at the same time, so five shares of China Mobile should be worth $52.31 based on the last Hong Kong close… the ADR is currently trading at $52.68 after climbing from an open of $52.40… so this one you can trade wherever is more convenient for you, both the US and HK shares are very liquid.

China Mobile is a mega-cap stock, with a market cap of $210 billion or so now, and it does have plenty of financial flexibility — they don’t carry nearly as much debt as the big US wireless carriers you are probably familiar with (like Verizon or AT&T), though they are a state-owned company and that should typically come at a discount to private companies (if only because the government’s priorities for the company may not always be the same as a private investor’s would be). Analysts are predicting continued steady growth for CHL as they continue to roll out 4G/LTE service to more customers (they’ve doubled their 4G subscriber count in the past year, but it’s still only about 500 million out of their 800 million subscribers who are on the “modern” high speed data network that enables us all to take advantage of our smartphones)… and it’s not expensive, there isn’t a huge amount of US analyst coverage but they’re estimating 20-30% revenue growth this year and next year and the stock is trading at a trailing PE ratio of only about 13 and pays a dividend of about 3.5%.

So, it’s a state-owned company (like virtually all large Chinese companies outside the tech sector), it is certainly controlled by the People’s Republic, and the stock has been pretty disappointing over the years other than the huge run in 2007 when all things China were fantastic (back then they also really flubbed the 3G upgrade cycle as the various Chinese mobile carriers were trying different technologies, which is perhaps part of the reason they’re pushing hard on 4G/LTE now and building their lead in that area). The PE being low doesn’t necessarily mean it has “bottomed out” — CHL has traded at a PE ratio below 10 couple times over the past five years during periods of China pessimism, but we are right now closing in on the lowest PE ratio the stock has had for two years.

I don’t know whether the stock will double in a couple years or not, but it’s within the realm of possibility and wouldn’t be crazy given the current valuation and the potential for continuing revenue growth as 4G adoption moves forward… though it’s also worth remembering that another 25% drop in the share price is well within the realm of possibility as well, particularly if people again lost interest in investing in China or the government’s heavy hand comes down on them in an unhelpful way (as in, “you must give everyone a 50% discount on their mobile data plan” or “you must invest $100 billion in building the next network in rural areas”).

Moving on…

“‘Project H’ Pick #3:

“This “life and death” stock could turn a $15,000 investment into $35,100

“This is hands down the most exciting Project H stock recommendation I’m making today.

“Not just because of its potential to make you 134% on your investment.

“But also because it’s the stock of a secure, government-owned business in a fast-growing market.”

I don’t know about “secure,” but the other two stocks Iskyan is pitching are also state-owned enterprises (SOEs) in “fast-growing markets,” so I’m not sure why this third pick should stand out on those terms.

What other clues do we get?

“This company specializes in a range of insurance policies, including life, accident and health…

“Due to the enormous growth of its middle class, China has been undergoing an incredible insurance-industry boom.

“And this company, the number one in the industry (they have more than a 20% market share), has been collecting huge monthly premiums from this surge in customer demand.

“As of end of June, their long-term insurance policies were up by 50.4% year-on-year.

“Their 10-year monthly premium policies were up by 74.5%.

“And the customers who are choosing a monthly premium from the start, were up by 68.3% year-on-year as of the end of June.”

I do generally love insurance companies and own several of them, but have never looked at the Chinese insurance industry (other than big global player Fosun, which I own)… but this one is the big guy, China Life (2628 in Hong Kong, LFC for the US ADR — LFC represents five shares of 2628.HK).

China Life is also pretty reasonably valued on most conventional metrics, though I don’t really know how best to compare a Chinese life insurance company to US insurers… among Chinese insurers, the similarly large Ping An (PNGAY for the ADR, ) looks more immediately appealing in terms of profit and asset growth and stock performance, but that’s based on just a very superficial look over the course of a few minutes.

And with that, I’ll have to leave you to your due diligence and your own cogitation on these Chinese stocks… are you interested in Chinese insurance or mobile telecom (or, going back to yesterday, air travel?). Agree with Iskyan’s picks of some very large-cap stocks in these areas, or have other favorite ideas? Let us know with a comment below.

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6 years ago

I can confirm that the picks you have identified are correct, but you also need to add a 3rd stock that he’s pitching; Air China (HK: 753)

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👍 124
6 years ago
Reply to  chrizcringle

Air China was in his first article on this newsletter. Yesterday.

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👍 306
6 years ago
Reply to  LostOkie

Ups, sorry.. Didn’t see until know that this was part 2. Too much stress around xmas 🙂

👍 124
6 years ago

To me I would look at chinese mobile phone manufactures as they will for sure achieve more market share at expense of Apple or Samsung due the fact that most mobile phones are already build in China and knowledge transfer will continue. As mobile devices will get better and more used this should ensure healthy growth in near future.

Another area which has much mroe growth is Alibaba which is going globally already as we speak.

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6 years ago

If your looking at China insurance stocks through HK,2328 is the most interesting of the lot it has a stranglehold on the general insurance game, last years written premiums 40 Bill and 75% auto, long term no brainer

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