You don't need a reminder that the Chinese stock market took a dive this week. That, combined with a few untimely comments from bearish economists, sub-prime lenders facing 'issues', housing foreclosures up, housing starts down, oil prices up and squabbling in Washington about federal spending took its toll and rattled world markets.
This writer remains an optimist -- and a pragmatist, which is of at least equal importance -- and still the contrarian. I don't care how scary China looks right now to some, this is a buying opportunity. Here's how I see it: In the long run the market is going up! The Chinese market will be the biggest market! And I want to buy at bargain prices for the long term!
The Aluminum Corporation of China ADS (NYSE: ACH), which I have discussed before, has not been mentioned in the conversations about Alcoa Inc (NYSE: AA) possibly being a buy-out candidate, or in the comparisons with Alcan Inc. (NYSE:AL), its Canadian competitor.
ACH closed yesterday at $22.98, with a P/E under 8.0 and a 5.5% dividend yield. In addition to this, the P/S was 0.65, and the P/B was 0.62. To me this indicates a tremendous value. What if its profits were to drop in half? Well, surprisingly, it would than be about par with Alcoa.
For comparison, Alcoa has P/E of 14.0 and a 2% dividend yield. The P/S was 1.17, and the P/B was 2.07. These are very favorable numbers, and I actually considered Alcoa to feature here. But, as you can see, it seems far more pricey than ACH. Also considering that Alcoa has been mentioned as a buyout target at a considerable premium to its current valuation - that only makes ACH look even cheaper. ACH has only been public for about 5 years, chart below.
You can see that it has had a wild ride but clearly an upward trend.
I do think investors should be cautious about such a company with a short public history, in a faraway land with little history in capital markets. That said, we bought some at $22.00 per share and are looking to add to our position.
If the prospects for Alcoa and Alcan are strong, what will the future market look like for ACH? The growth opportunities appear greater in China than anywhere else. Even though the Chinese stock market was dragged down this week, and ACH with it, I did not hear of any slowdown in Chinese car production, defense spending, energy and so forth, that would affect ACH in particular. All I heard and read is that the stock market prices were too high after five strong years, culminating in a 2006 run-up exceeding 100% in many cases, and at that point it had to come down. But some things were more inflated than others.
The price-to-sales ratio can't be zero, can it? The price-to-book ratio is less than one now, will they give the company away for free? The downside risk is that the company is lying about the sales, or that its books are cooked. Impossible? -- nope, not for a Chinese company, or for that matter, an American one. However, I have faith that if something is crooked with a company that is partially government-owned, they would make it it right just to save face if nothing else, and to sustain foreign investment. They have already had hangings after short trials for embezzlers and swindlers. These are some high stakes compared to the fines we have negotiated with some of our own corporate pirates here in the U.S.
The 5.5% yield does not seem like it will be hard to afford, seeing that ACH has almost a 20% profit margin. One might even view ACH as a safe haven even if you do not think the growth prospects are as good as I do. So from a value perspective, a growth perspective, an income perspective, a commodity hold against inflation, a comparison perspective and anything else I can figure out this company seems like it is worthy of your consideration. It is currently one of my favorites.
The companies I draw your attention to in my Chasing Value column are very special companies, and they are stocks I would buy for my children for the long term. I cannot give something more consideration than that. If you would like to read my previous posts I have included them below.
Two weeks ago: Chasing value: Wells Fargo
Last week: Chasing value: Anadarko Petroleum - got it!
Check out my other posts for BloggingStocks here.
Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm.
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