Thursday, June 24, 2010

New position: China Natural Gas Inc

I have been following and studying a company called "China Natural Gas Inc" (NASDAQ: CHNG) for a while now. I finally decided to take a long position in it.

The company provides pipeline natural gas for industrial, commercial and residential use and compressed natural gas (CNG) for vehicular fuel in Xi'an, China. Xi'an in Shaanxi province is a fast growing city supported by a population of approximately 8.5 million. The company is also active in Henan province which is the China's most populous province.

They have very good growth possibilities because:
  • China is likely to overall increase use of natural gas (both in absolute terms and relative to other energy sources)
  • The northern region of Shaanxi Province is the home to China's second largest natural gas reserve.
  • By the end of March 2009, CHNG had operated 35 retail CNG fueling stations. This is not much compared to how much potential there is.

To start with, the valuation of the company is very attractive. P/E is at 7.2 and if you take into account the amount of cash the company owns (roughly 30% of whole market cap in my estimate) the price is morea than attractive. P/B at 1.05 is also screaming BUY!

Some other statistics (all statistics in this article from:
ROA 11,4%
ROE 16,7%
ROI 11,9%
Gross margin 48,4%
Profit margin 22,7%

The company is fairly small (market cap 155 MUSD) but is growing at a very fast pace. It does not seem to pay dividend, but that is understandable in the current situation the company is in (growth phase). The company is low on debt even though it has an ambitious investment program (LNG plant etc.).

From stockholder point of view, I think the biggest risks related to how the company will grow (i.e. do they issue a lot of new stock in a way that does not benefit current stock holders), do they issue preferred stock (which seems to be OK'ed but not implemented) etc. Also, the usual question is that how much the management will take from the cake in form of compensation and stock options. There were also some quite "interesting" loans granted to some individuals which is something that I haven't come across before in a publicly listed company.

However, I think overall the company is a clear BUY.

In particular I like the concept of natural gas propelled vehicles. That is such a superior concept from environmental point of view and also much cheaper fuel than gasoline or diesel. Some day in not-so-distant future there will be oil crisis because there certainly will not be enough of it to go around. That is why countries like China will favor alternative energy sources and there is no other way than UP for companies like CHNG.

Thursday, June 17, 2010

New position in Brazil: Copel

I have been searching for attractive investment opportunities in the utility sector besides Fortum Corporation (Helsinki: FUM1V) and now I have found a good one: “Companhia Paranaense de Energia” or “COPEL” (NYSE: ELP).

Copel is a Brasilian company and that’s a big plus to start with. Long term, I believe that BRIC countries are better places to put your money than the so called developed countries. One word: Growth!

The company was founded 1954 and is now the largest company in the state of Parana. It serves some 2,8 million homes, 67 plants and 300 commercial establishments and has staff of 8440 employees. Copel produces about 7% of the total electricity consumed in Brazil.

I am a big fan of electric power companies that generate majority of their power in either nuclear- or hydroelectric plants (i.e. no direct CO2 emissions). Copel is basically pure hydro play as out of its fully owned 18 plants 17 are hydroelectric plants. Hydroelectric plants have total of 4530 MW of installed capacity. The only fully owned thermoelectric plant has installed capacity of 20 MW. Via partnerships the company also has 220 MW of hydro, 388 MW of thermal and 2,5 MW of wind power.

Most of the contracted energy seems to go to regulated market until 2012 after which the free market portion will grow from the current low figure of 11%. To me this kind of information translates to higher average sales price for electricity and there seems to be definitely a big upside for profits in near future.

In addition, Copel has close to 2000km of high-voltage transmission lines and 180.000 km of distribution lines. It also operates optical transmission network for telecom/data reaching 217 cities and totalling 9580 km worth of optical cables.

The state of Parana owns 31,08% of the company, BNDESPAR (BNDES being Brazilian Development Bank so this looks like some sort of government entity) owns 23,95%. 44,09% of the stocks are free float. The stock capital is divided to common stock and two different preferred stock. Only 13,5% of common stock is free float while 78,5% of preferred stock is free float.

When buying the company from NYSE, you basically get preferred B stock. The dividend policy seems to favour preferred A, but on the other hand preferred B stock gets more dividend than common stock. For year 2009, the dividend was R$ 1,63 per class A, R$ 0,96 for class B and R$ 0,87 per common stock. With current real/USD exchange rate and ELP quote, 2009 dividend yield is around 2,8% for preferred B stock.

Some statistics (source:
  • P/E 7,7
  • P/B 1,2
  • ROA 9,8%
  • ROE 16,1%
  • ROI 11,8%
  • Gross margin 58,3%
  • Profit margin 21,8%
Debt/Shareholders’ equity ratio is 0,24. Out of all debt, most is denominated in local currency.

I hope they keep up the good work as I now own a little piece of the company!

Monday, June 14, 2010

Increased JNJ position

Johnson & Johnson (NYSE: JNJ) has lost about 10% of its value since I included it to my portfolio late April by buying a small position in it. I decided to triple my bet in it making it now one of my largest stock holdings.

Back in April I thought it is an excellent company trading at fair price. The price still ain't cheap, but I feel this is a good entry point. Double dip or no double dip.

Tuesday, June 1, 2010

The case for gold miners

The reason why I like gold miners is really simple: When gold goes up, the companies profits multiply a lot faster than the price of gold. Here is an example:

Let's assume a hypothetical gold miner "A" can extract gold from ground with "cash cost" $600 per troy ounce of gold. In addition, let's assume that all other costs related to the ongoing mining operations (depreciation/amortization, financing costs etc.) are $200/oz.

With gold price $1200/oz the company makes profit of $400 per ounce.
If gold price changes 10% in this hypothetical case (i.e $120, up to $1320 or down to $1080) the profit changes 30% (i.e $400 plus/minus $120).

No wonder many prominent hedge fund managers are long on gold miners. So am I, but not as much long yet as I will be. The reason is that the mining stocks take as much beating on bear markets as any other sector or even more. You can check yourself what happened to gold miners between 2008 and 2009.

Currently I am confortable holding two large caps that are unhedged (i.e. do not have significant derivative positions that fix the price of gold that they are selling in future). What I just explained above does not apply to those miners that have large hedge books because they will not benefit from the raising gold prices. On the other hand they don't suffer if the price falls significantly.

Newmont Mining

Barrick Gold

It has been a while when I last took a deep dive into these companies, but here is what was my rationale behind taking a position in these companies.
  • They are large, have several big and profitable gold mines.
  • Most of the mines are located in politically relatively safe areas.
  • Newmont does not have hedge book, Barrick may have still a small one (but not significant in my opinion anymore)
  • They have huge reserves (especially  under "proven & probable")
  • Manageable debt levels
  • No preferred stock outstanding (I hate the concept of someone taking guaranteed cuts of profit before common stock)
  • They pay dividend, although still small compared to some other sectors
  • They look fairly priced compared to their peers, but not necessarily compared to other sectors. Newmont P/E is 16,3 (source: Google Finance) while you get many utilities, telecom and pharma stocks with P/E around 8-12. However, it's all about _future_ profits. Not 2009 or 2010 estimated profits. Barrick 2009 P/E was negative due to unwinding of their hedge books.