Shares of GSH do not have the volume of other picks but trade for just 0.8 times book value and pay a 2.4% dividend yield. Revenue is expected to rise 10% this year on smaller government programs, but the company is the best positioned to take advantage of the shift in urbanization and growth in infrastructure needs.
Utilities
With a market cap of $13.9 billion, Huaneng Power International Inc (ADR) (NYSE:HNP) is China’s largest provider of electricity. The economic slowdown has hit the company with revenue increasing just 1.4% in 2012 to $21.5 billion, but the drop in coal prices helped the company decrease cost of revenue by more than 8% and boosted its gross margin by a third to 31%. The shares trade cheaply at just 9.7 times earnings despite a strong 3% yield. The recent drop of 20% in the share price offers long-term investors a more reasonable entry point.
Beyond the long-term potential providing electricity to a rising urban population, I think Huaneng Power International Inc (ADR) (NYSE:HNP) will eventually unlock some serious shareholder value through asset sales. Though electricity production accounts for 98% of the company’s revenue, Huaneng Power International Inc (ADR) (NYSE:HNP) is also involved in a mix of other segments, including cargo transportation, port management and warehousing services, machinery leasing, and industrial waste management. However, the company lost $8.2 million on revenue of $98 million among those segments in 2012. A sale of these assets to a company that can more efficiently manage them could mean cash to shareholders — and a more efficient business model.
Pollution Control
Fuel Tech Inc. (NASDAQ:FTEK) recently reported $5.7 million in new contracts from an existing client and three new Chinese customers for optimization systems and emission control of coal-fired plants. The $89 million Illinois-based company provides pollution control systems to customers worldwide. Revenue has grown by 10% a year since 2009 to $97.6 million last year. Shares are down almost 90% since the 2007 high but have settled at $4 a share to trade at book value. This is a company with high upside on a return of investor sentiment or a strategic event like a merger or acquisition.
Risks to Consider: The stocks are bound to be volatile over the next year as investors weigh the extent of the slowdown in China. Investors need to be able to wait for this massive long-term growth driver to send shares higher.
Action to Take –> Even if the full $8.1 trillion of required investment is not realized, the recent sell-off presents a great long-term opportunity for investors to get back into select Chinese companies.
P.S. — Investors should expect to hold these stocks for several years before the effects of the recommended $8.1 trillion in spending begin to materialize. If you prefer to hold stocks for several years or longer, you may be interested in what we call “Forever Stocks” — stocks solid enough to buy, forget about and hold “Forever.” To learn more about these stocks — including some of their names and ticker symbols — click here.
– Joseph Hogue
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