Author: James Hofmann
Model: Greater China
Disclosure: Long MY
Chinese equities have been facing a lot of headwind lately. The Bank of China has been continually raising rates and reserve requirements for the past few months in an attempt to slow inflation. This, combined with lower growth rates, has been putting downward pressure on equities. Overall, I view this as a positive for the market as the central bank is working to keep the economy from overheating and not letting the situation get out of control. The earthquake and accompanying tsunami that struck Japan has also been weighing on equities in the greater Asia region.
I believe the model also suffered a little bit in March from its small to mid cap bias because when fear enters the market, investors move into the bigger, more defensive names.
The model definitely took a beating in March, but it is relevant to note that after the fall, it has recovered to being positive since inception. I look at this portfolio every day and run through the names. I am currently very comfortable with all of the positions. I see upside here. It is just a mater of waiting through the volatility until the rest of the market gets on board.
This month I want to highlight a new position we are building in China Ming Yang Wind Power Group Limited (NYSE: MY). It is another renewable energy play out of China, but this time we are aiming for wind exposure. China’s and the world’s energy demands will continue to rise, and I believe building a strong position in some Chinese players in the renewable space will be important for two reasons.
One is that low cost production in China will allow the nation to make its products more competitive in the renewable space. Reason two is that China will need these products to bring clean energy on to their grid, to balance off all of the coal plants.
China Ming Yang Wind Power Group also offers us a great entry point as it is trading at a price to earnings multiple of just 7.9 based on 2011 forecasted earnings, as of 4/6/11. The firm also has a strong profit margin of 12% for the trailing twelve months in a competitive space. Lastly, the firm has nearly $3 a share in cash to reinforce its balance sheet and fund future growth and expansion.
I am looking forward to holding this position for the long term and hope to see our investment assumptions come to full light.
Market Outlook
The Chinese economy has been doing well lately, despite all of the complaints about it slowing. The reality on the ground is that China is still growing, it is just the rate at which it is growing is slowing which makes sense as the economy gets bigger. I am currently still very bullish on the China story and am OK with the market taking a breather while we wait for it to see the value in the great names we own.
Sources:
“China Ming Yang Wind Power Group Limited Reports Fourth Quarter and Fiscal Year 2010 Results” China Ming Yang Wind Power Group Limited, 3/9. https://finance.yahoo.com/news/China-Ming-Yang-Wind-Power-prnews-3717615015.html?x=0&.v=1
