3 Stocks To Buy To Play China's Recovery
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
China's economy grew close to 8 per cent last year and activity picked up in the 4th quarter, leading economists to estimate that the better-than-expected momentum at the end of 2012 will likely continue into 2013.
China's economy grew 7.8% in the fourth quarter, rebounding from a more than three-year-low of 7.4 per cent in the previous three months. Despite the economy growing at some of the slowest rates over the past decade in 2012, the monetary value of growth is still huge. Even at the lower growth rate of 7.4% China is still adding about $540 billion to its economy every year - roughly the same size as Sweden's economy.
To put it another way, the largest 24 economies in the world only have a GDP of greater than $540 billion.
Even with growth at a slower rate, China still needs a huge amount of machinery and resources to keep it going. So where to invest?
Joy Global (NYSE: JOY)
I believe one of the best ways to play China is through the relatively small but powerful Joy Global. I have already written about Joy in many previous articles but this will be specifically liked to China.
Joy Global specializes in the manufacture of mining equipment and the company has a special focus on coal mining:
'Global demand for coal is expected to grow to 8.9 billion tons by 2016 from 7.9 billion tons this year, with the bulk of new demand — about 700 million tons — coming from China, according to a Peabody Energy study. China is expected to add 240 gigawatts, the equivalent of adding about 160 new coal-fired plants to the 620 operating now, within four years. During that period, India will add an additional 70 gigawatts through more than 46 plants.'
Like all miners, the company watches China closely and attempted to call the bottom of China's growth slowdown in September of last year. Joy has a special interest in China due to the high coal demand in the country and to take advantage of this Joy has been building exposure in the region through acquisitions.
Joy noted that in November electricity demand in the country was up 8% and exports were up 14%, the company also registered an increase in truck movements and volumes of freight moved.
It's not just China that the company is seeing increased demand within. Joy has noted that the rise in Natural Gas prices, back up from their lows in 2012 has pushed more power plants to start using Coal again with total power generated from coal up from 36% in mid-2012 to around 39% in the 4th Q.
The company also notes that the majority of global steel producers and power plants have reduced inventory levels over past year as economic conditions worsen. Joy forecasts that these low inventory levels will only last until around the second half of 2013 when it believes companies will start re-stocking and the growth outlook should improve.
The coal market is starting to move again and Joy now even better positioned than it was five years ago to take advantage of this growth. The company should see solid earnings growth ahead.
Cummins (NYSE: CMI)
Cummins specializes in engines, components, power generation, and distribution. Cummins was founded in 1919 and as a result has a rich history of operating through tough economic times and constantly innovating to stay ahead of the crowd.
Cummins has reported a YOY drop in worldwide sales to the tune of 4.5%; however, the company has been focusing on margin improvements and efficiencies through the down turn. Cummins has also been working on increasing its exposure to the developing markets such as China, India, and Brazil over the past 5-years, so they now account for 20% of total revenue. Cummins has increased sales in these regions 90% over same period as well.
Cummins also has scope to make significant headway in the power generation markets in both India and China through its power division. India is still conically short of power and as I have mentioned China's power demands continue to grow.
Furthermore, as I have already mentioned the group has an engine division and this is strategically placed for increasing export volumes in China, which will lead to an increased demand for trucks. On top of this the group has significant scope to grow as the average income in China grows - leading to higher vehicle demand.
Cummins in my opinion is one of the strongest western businesses in China, maybe even stronger than Caterpillar, due to its diverse range of interchangeable products and first mover advantage. Indeed, Cummins has been in China since 1970 and has formed many strong bonds with internal companies out there.
Emerson Electric (NYSE: EMR)
Emerson Electric is a diversified technology company, engages in designing and supplying products and technology, and providing engineering services and solutions to the industrial, commercial, and consumer markets worldwide. Emerson Electric Co. was founded in 1890 and is headquartered in St. Louis, Missouri.
Emerson Electric is another play on Chinas growth and growing industrialization. With the growth in China starting to pick up there should be an increase in manufacturing and Emerson is well placed to take advantage. Emerson is a specialist in factory automation systems which should see a boost as Chinese factories start producing for both the consumer inside and outside China. I believe the company would then see a further boost as the rest of the world gets back on its feet.
China aside, Emerson also produces uninterruptable power supplies for data networks, a market that is constantly growing, even if the rest of the world is not. Emerson also has operations in the US where economic activity is picking back up and in South America which is still a strong area for growth.
In the third quarter of last year Emerson noted that it saw a 18% increase in revenue in its energy management business. This opens up more opportunity in China and India as the world demands more power.
Although not as exposed to China as Joy and Cummins, Emerson's manufacturing division still offers opportunity.
So those are my key picks for China for this year - If I had to pick a favorite I would say Joy Global offers the most potential. If I could pick two, I would say Joy and Cummins - diggers and power.
RupertHargreav owns shares of Joy Global. The Motley Fool recommends Cummins and Emerson Electric Co.. The Motley Fool owns shares of Cummins and Joy Global. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!