Saturday, July 18, 2009

Investing in China

The Chinese economy is growing at a rate of about 2 times to 3 times the rate of developed market economies. Consequently, the chances of making a buck on investments might reasonably be assumed to be better on investments in Chinese based companies than those of developed markets assuming the valuations of those companies are not unreasonable.

There are three principal methods that a US citizen can use to invest in Chinese companies. 1. U S listed Chinese companies 2. open end mutual funds 3. exchange traded mutual funds. There are quite a few Chinese companies listed on US stock exchanges. Among the larger Chinese Companies are the following which can be bought on US exchanges.

Aluminum Corp of China ACH aluminum mfg. 3.4 billion cap
Bank of China BACHY bank about 100 billion cap
China Life Ins. LFC life insurance 116 billion cap
China Petroleum and Chem. SNP oil and chemicals 72 billion cap
CNOOC CEO oil 52 billion cap
China Mobile CHL cell phone 190 billion cap
China Telecom CHA 31 billion cap

There are quite a few other Chinese companies listed on US exchanges. These are just a few.

There are about 8 exchange traded index funds available.

iShares FTSE/Xinhua China 25 index fund FXI 5.5 billion cap
PowerShares Golden Dragon Halter USX China Portfolio PGJ 232 million cap
SPDR S&P China etf GXC 180 million cap

The others are specialized and very small cap.

Among closed end Chinese funds which are traded as etfs are the following:

Greater China Fund GCH 202 million cap 10 year return 14%
China Fund CHN 400 million cap 10 year return 17%
JF China Region Fund JFC 60 million cap 10 year return 9%
Morgan Stanley China A Shares Fund CAF 270 million cap (this fund invests in A share securities that are not available to foreign investors generally) It has been in existance only 2 years.
Templeton Dragon Fund TDF 711 million cap 10 year return 15%

Among open ended funds:

Fidelity China Region Fund FHKCX no load 10 year return 8%
Guinness Atkinson Chin & Hong Kong ICHKX no load 10 year return 9%
Matthews China MCHFX no load 10 year return 14%
AIM China Class A load 3 year return 16% has not been in existence 10 years.

Wednesday, July 8, 2009

Master Limited Partnerships

Master Limited Partnerships (MLP) are companies that pay out all of their earnings in dividends. With this corporate structure they avoid paying taxes. In that respect they are somewhat similar to real estate investment trusts (REIT) which also pay out all of their earnings in dividends. Because of this the dividends under current tax law are taxed not at the reduced dividend tax rate but at the full tax rate. That is a very important consideration to keep in mind for both for for MLP and REIT. One of the consequences of this is that investments both in MLP and REIT are more suitable currently for tax deferred accounts rather than for taxable accounts. They are more suitable in both a traditional IRA and a Roth IRA as are also taxable bonds.

Most but not all MLP are pipeline companies. There are also a few propane companies, coal companies, and marine transport companies. In certain instances one can buy shares in either the Limited Partnership or the General Partner. The Limited Partnership pays in many cases an incentive to the general partner that increases with increased distributions reaching about 50% of the distribution amount at a certain point. In other words there generally becomes a point where the general partner takes home half the distributions.

Since limited partnerships pay out all of their income one thing to take note is that in order to build capital projects they rely on borrowed money. Consequently, many have very high debt to equity ratios. In other words some are very highly leveraged.

There are somewhere in the neighborhood of about 80 publicly traded MLP and their general partners which also qualify as limited partnerships themselves.

Since this blog format does not allow publishing data in columnar format, I am limited in that data that I can publish in an understandable manner. I will describe two of the MLP so the reader can become familiar with these investments.

The largest two MLP are Enterprise Product Partners LP ticker EPD with a market cap of about $11 billion and Kinder Morgan Energy Partners LP ticker KMP with a market cap of about $10 billion. In other words most are mid cap companies and some are small cap companies. The median market cap of the pipeline segment is a little less than $3 billion so indeed the average MLP is a small cap company.

EPD operates over 30,000 miles of natural gas, oil, and petrochemical pipelines. In additon they have natural gas processing plants and natural gas storage facilities. They have $18.4 billion in assets and $9.3 billion in debt or about 52% of capitalization. Their revenue is about $20 billion. The current dividend is $2.15 pershare or about 8.6% based on the current stock price of $24.85. The current PE ratio is about 14.2. During the past 10 years the company has increased the dividend annually at a rate of about 8%. EPS however have not increased at so steady a rate although over that period they did increase at about 9% annually. To be noted is that EPD has grown significantly due to acquistions. Their most significant being a $6 billion merger with GulfTerra in 2004. The company has a DRIP plan with a 5% stock discount which is also available through broker held shares.

KMP operates about 24,000 miles of natural gas pipelines also natural gas processing plants and storage facilities. They have $17.5 billion in assets and $10+ billion in debt or about 57% of capitalization. Their revenue is about $10.8 billion. The current dividend is $4.20 or about 8.3% based on the current stock price of $50.75. The current PE ratio is about 31. During the past 10 years the company has increased the dividend annually at a rate of about 12.4% but recently the dividend increase has been at a more modest rate of 8%. EPS has not had so great an increase over that time increasing only 4% annually. Cash flow has however increased more significantly growing at 14% annually.

Other notable pipeline MLP and general partners are BWP, BGH, CPNO, ETE, EPE, EPD, MGG, MMP, NS, OKS, PAA, SXL, TPP and WPZ. Among coal are ARLP, NRP, PVR. Among marine transport are CPLP, NMM, OSP, KSP, TOO, TGP. Among propane are APU, FGP, NRGY, SPH.

If you should choose to invest in a MLP, check carefully their debt load and their track record.