Translated by Andrew Vanburen from a Chinese-language piece in Securities Daily
WE ARE IN the high tide of the reporting season.
As of Thursday, 922 A-share firms have disclosed their 2011 results.
So far, transportation, farming, public utilities and chemicals have had the most robust cash flow situations, surging 188.12%, 155.31%, 142.74% and 90.81%, respectively, on a three-year compounded basis..
How did they get to this point and what does it mean for their market performance this year?
It was none other than the great Warren Buffett who once said: “The freedom, volume and vitality of a company’s cash flow is one of the best indicators of whether or not a stock belongs in the ‘great’ category or not.”
And it could even be extrapolated that in some cases, Buffett puts a higher premium on a company’s cash flow than he does on said enterprise’s earnings growth potential.
The abovementioned four sectors have in fact shown a strong growth in cash flow over the past three years running.
Thus, there are investment opportunities to be had in all four.
Photo: Andrew Vanburen
Transportation: Major Driver
The 12th Five-year Plan brings with it a host of government-led growth opportunities for transportation themed firms.
Of the 40 some odd transportation plays already going public with their 2011 reports, they have already displayed a three-year compounded cash flow growth rate of 188.12%, giving the overall sector a first place rating in this category.
Aircraft maintenance firm Sichuan Haite High-tech (SZA: 002023), motor coach maker Zhongtong Bus & Holding (SZA: 000957) and truck maker Jiangling Motors (SZA: 000550) have seen three-year cash flow increases related to their operational and production based movable assets surge 5,871%, 611% and 530%, respectively.
At the same time, Sunbird Yacht Co (SZA: 300123), automaker Great Wall Motor (SHA: 601633) and auto parts play Huayu Automotive Systems (SHA: 600741) all stood at above 300% over the identical period.
Last week, the State Council – the country’s cabinet – announced that as part of the current Five-year Plan, it intended to prioritize the completion of a significant batch of major railroad projects across the country, with several being earmarked as “urgent.”
Furthermore, the governing body would promote the construction of several inter-provincial national level highway projects as well as major thoroughfare development in many rural areas, boost coordinated trunk highway development across the PRC with a special emphasis on the core Yangtze River Delta region, and streamline the building of airports and the connected transportation network to and from their host cities.
These bold and sweeping announcements are in and of themselves sufficient to drive transportation themed stocks for all of this year and beyond, with Founder Securities recently recommending investors pay particular attention to opportunities in the rail sector.
Photo: Andrew Vanburen
In the first two months of this year alone, fixed asset investment in China’s overall transportation sector was down 7.0% year-on-year at 100.1 billion yuan.
Within this figure, the cost of projects completed in January fell 48.6% year-on-year to 30.49 billion yuan, while rising 44.3% in February to 69.58 billion yuan.
Broken down by projects and regions, highways, inland river transport and coastal areas attracted investment over the January-February period of 85.98 billion yuan, 3.58 billion and 4.26 billion, respectively, down 12.2%, 0.1% and 2.8% from a year earlier.
However, with last week’s encouraging news from Beijing, it is likely these figures will take off going forward.
Therefore, Pingan Securities recommends investors stock up short term on counters in the sector with strong earnings performance and keep a close eye out for major project signings.
The country’s farming/fishing/forestry, public utilities and chemicals sectors also offer tremendous Five-year Plan-inspired growth opportunities, though not to the extent that transportation provides.
Once again, cash flow is a telling indicator of the opportunities in these sectors and the relatively ready availability of investment capital
Case in point is the farming/fishing/forestry industry which, at least among related counters reporting 2011 earnings to date, has shown an aggregate 155.3% three-year compounded increase in cash flow over the period.
Some sector plays to keep a watch on include food processer COFCO Tunhe (SHA: 600737) and natural plant-based condiments producer Chenguang Biotech (SZA: 300138).
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