China's Growth Story and BHP Billiton Cyclical Opportunity
Companies / Metals & Mining Jan 29, 2009 - 03:07 PM GMTBy: Oxbury_Research
Year of the Ox - I want to wish a happy new year to everyone of Chinese descent. According to the Chinese calendar, 2009 is the Year of the Ox. The Ox is said to symbolize prosperity through fortitude and hard work. That description seems to be a very appropriate way to describe the country of China as a whole.
One used to be able to describe the United States in the same way, but no longer. Our country seems to have become a country based on selling, customer service, and paper shuffling. It's hard to build long-lasting real wealth solely on paper shuffling, such as financial engineering. Just ask Wall Street. It looks like 2009 may be another year where their ox is gored.
If someone is foolish enough to watch the shills on CNBC, that person would think that the US economy is in much better shape than any other economy on the planet. Ox manure! I can't think of anything that is further from the truth.
Watching CNBC, one would also think that one of the worst economies on the planet right now is China. More ox manure! Again, nothing can be further from the truth. Despite the global economic slowdown, China's economy is still doing comparatively well.
China Growth
The China growth story is not dead – their economy should show a growth rate of approximately 6% this year. I won't go into all of the positive events occurring in the Chinese economy here, but I do want to touch on some key points.
- China has massive foreign reserves. At the end of 2008, China had nearly $2 trillion in foreign reserves. The most liquid financial institution on the planet is the Chinese Communist government! If necessary, the Chinese government could dip into these reserves in an effort to stimulate their economy.
- Speaking of stimulus, China has already announced a massive $586 billion stimulus program. It is fully expected that additional stimulus packages are on the way this year. China has also begun to sharply reduce their interest rates and increase bank lending in an effort to stimulate their economy.
- In 2008, China's domestic consumption rose at a torrid 28% rate. In 2009, despite the global slowdown, domestic consumption is still expected to show a mid-teens growth rate.
- China's burgeoning middle class, standing at more than 100 million people, is already the size of the middle class in the United States and growing rapidly. Unlike debt-laden Americans, the Chinese save 35 cents of every dollar that they earn. As the Chinese economy continues to develop, Chinese consumers will begin to spend even more of their hard-earned cash on consumer goods.
Despite the ongoing success story in China, many people are still afraid of investing directly into Chinese stocks. For these people, the best way to invest in the China growth story is indirectly through companies that stand to benefit from continued growth in the Chinese economy.
BHP Billiton
I believe that a fabulous way to invest in the China growth story is through China's neighbour in Australia – natural resources giant BHP Billiton. Many of the company's main assets are located in the Asia Pacific region, strategically close to China.
With the ongoing financial crisis, I strongly believe that investors should only own shares in companies that are financially strong and that are not reliant on access to the credit markets for their continued existence. BHP Billiton certainly fits the bill.
BHP Billiton is the world's lowest cost producer of natural resources and also the largest diversified natural resources producer in the world. BHP Billiton is a major producer of copper, iron ore, coal, aluminium, oil, gas, uranium, manganese, nickel, silver, titanium, and diamonds. China, of course, is a voracious consumer of most commodities that BHP Billiton produces.
BHP – the Company
BHP Billiton has a well-respected management team who “sticks to their knitting”. The central tenet of BHP Billiton's business model is that its diversified portfolio of high quality, low-cost assets provides stable cash flows and an enhanced capacity to drive future growth. In the 2008 fiscal year, the company generated revenue of $59.5 billion, attributable profit (excluding exceptional items) of $15.4 billion and net operating cash flow of $18.2 billion.
The company's strong cash flow, combined with a conservative debt leverage of only about 22%, has allowed the company to maintain its level of investment back into its business. BHP Billiton has also maintained its share buyback program and has regularly increased its generous dividend payout.
The global recession will, of course, effect BHP Billiton. But the recession will have an even greater effect on its smaller, less financially-sound competitors. With many marginal players shutting down production or going out of business entirely, BHP Billiton stands to benefit greatly. The company should actually be able to expand their profit margins and perhaps pick up distressed quality assets very cheaply.
BHP – the Stock
Right now, as evidenced by the Treasury market, Wall Street is expecting the current deflationary downturn to last for decades. I do not believe that delusional scenario for a second. The economy will rebound sooner or later, just as it always does. BHP Billiton will be superbly positioned for an economic rebound and renewed economic growth in emerging markets such as China.
For the past 52 weeks, BHP Billiton's stock has traded between a high of $95.61 and a low of $24.53 per share. The stock is currently trading near $38. With the terrible global economic conditions that are currently priced into the stock, the price earnings ratio is at a depressed level of only 7!
The current dividend yield on BHP Billiton is a very nice 4.3%, so investors are being paid a good yield while they wait for global economic growth to resume. Investors should keep an important point in mind - BHP Billiton's dividend is very secure. The same cannot be said for many other companies.
Historically, recessions are the best times to pick up quality cyclical stocks for large-sized, long-term capital gains. Investors are urged to purchase BHP Billiton at the current depressed levels for spectacular long-term gains.
Shannon Roxborough
Analyst, Oxbury Research
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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