Almost China

By Patrick King - July 26, 2012 | Tickers: T, BIDU, CMGE, VZ | 0 Comments

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Last December, in China's Price for Success, I argued that "as one of the few big fast-growing markets left, you almost have to invest in China." I have come to believe that almost was the key word in that statement.

Back in December, China's economy was expected to grow at 7%. According to Forbes, that's still China's official line, but the same article points out that China's electricity consumption has grown less than 4% year on year as of April. The Forbes article argues that this statistic may mean less than it has in the past, but that may sounds a lot like my prior almost. Tie that with more recent news about their weakening trade growth. The really interesting tidbit here is China's weakening import growth. Has China really gotten that good at reproducing Western luxury goods, or is the Chinese consumer running scared? Let's add a 50% increase in coal stockpiles into the mix. It's hard to put a bullish spin on that, so I think it confirms a negative interpretation of the other stories.

So from prior growth rates topping 10% to an expected 7% to an apparent 4%. What may a 50+% cut in the Chinese growth rate mean to Chinese stock price multiples?

And should we believe Chinese figures in general? "There is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles." This makes sense when you work at the pleasure of the central government. Lately, it's been reinforced that everyone works at the pleasure of the central government. The central government of China is influencing the reporting of basic economic statistics and of private companies' results.

If you accept this, then you have to question the numbers provided by every Chinese ADR out there. You have to question the numbers every Asian investment fund has to count on.

And the growth story was the only positive point of my argument in my original post. China still faces

• Contagion: Europe is the big risk.
• Currency Risk: Last year, the yuan's strength was the story. Now it is weakness. A weakening currency is consistent with recent interest rate cuts, and reinforces the idea that China's economy is slowing.
• Labor unrest.
• Civil unrest.

Which is why, in my prior post, I noted that I left my Asian investing to the experts, relying on Matthews China Fund (MCHFX) for that piece of my portfolio. Matthews still rates four stars from Morningstar, and continues to outperform over the last 10 years, but it has underperformed for the last 3. Could even the experts be fooled in this scary new world? I haven't decided, but I'm not happy.

My individual stock pick, China Mobile Ltd. (NYSE: CHL), has done quite well, up 17% since I mentioned it. On the other hand, fellow telecom AT&T (NYSE: T), which I talked about in another forum back in September, is up 22%, roughly equal when you consider the time difference.

Let's throw in Verizon Communications (NYSE: VZ), another American telecom. It's up 19% year over year, again roughly comparable to it's Chinese sibling.

So is it China, or is it the industry? Does China offer any value?

*5 year figure, TTM not available

On the face of it, China Mobile offers superior growth at a bargain price, but hey, no current data on recent earnings? And why such a massive P/E difference compared to it's American competitors? Both the lack of recent data and the evidence of government manipulation support a strong discount against the Chinese company.

Let's have a quick look at Chinese and American companies in another industry:

Baidu (NASDAQ: BIDU) appears to offer a more compelling argument, in that it's cheap compared to its growth rate. However, it is expensive compared to its peers Google and Yahoo, so backing it requires backing Chinese arithmetic. Since Baidu is even more likely subject to government influence than the typical Chinese company (although, for the truly skeptical, being a government endorsed monopoly may be a plus), I am even more skeptical of its earnings.

Is diversifying in China buying you anything? Almost.

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