Last week, U.S. Senate passed the Holding Foreign Companies Accountable Act, creating uncertainty to many Chinese companies listed on U.S. exchanges. In this week’s Silver Lining, CIO Scott Morrison explains why he is still investing in a Chinese company, one that is listed in Shanghai.
In September 2014, Chinese e-commerce giant Alibaba IPO-ed on the New York Stock Exchange in what was the biggest IPO in U.S. history, bigger than Google, Twitter, and Facebook IPOs combined. Alibaba is one of many Chinese companies that are listed in the U.S. today. Fast forward to last month, Luckin Coffee (the Chinese answer to Starbucks), which IPO-ed on NASDAQ less than a year before, announced that COO Jian Liu had fabricated sales transactions, causing NASDAQ to delist the company and the Senate to pass a new bill requiring strict transparency from other Chinese companies listed in the U.S.
The bill may cause uncertainty for U.S.-listed Chinese companies, but it can be good news for Chinese companies that are listed and sell domestically. The reason is that if there is any economic retaliation from the Chinese, the global leaders, many of whom are U.S. companies, will be sure to take a hit, vacating their thrones for Chinese brands. One of these Chinese companies that I want to focus on is Sany Heavy Industry Company Limited (三一重工股份有限公司), traded on the Shanghai Stock Exchange.
As more and more countries start to lift lockdown restrictions, citizens are looking forward to resuming pre-COVID activities such as going back to school, meeting friends, relaxing in the park, etc. This also means the resumption of many business activities that were forced to hit pause during the lockdown like non-essential construction. Currently, many countries are looking to China, the first country to enforce nation-wide lockdown back in January and one of the first countries to ease its restrictions on its business activities. As the Chinese economy picked back up in March and April, one of the biggest areas of sales boost was in construction machinery.
As the world grapples with the fallout from COVID-19, customers will increasingly look towards industry champions from China.
In China, several major heavy machinery manufacturers have announced a 5-10% price increase as demand hit a record high in March, when their lockdown eased and construction rebounded. CICC, a Chinese investment compiled a Chinese excavator usage index which was up 13.7% in March (after 22.4% drop in January and February of this year).
I have visited the Sany office in China twice over the last ten years. Both times, I was very impressed by my factory tours. Sany is pronounced “San-Yi” (三一) in Mandarin, which in Chinese literally translates to “three firsts”, referring to the company motto – to build a first-class enterprise, to foster first-class employees, to make first-class contributions to society. Throughout this decade, Sany not only catapulted to the number one position in market share in China, they also closed the gap technologically against global incumbent heavy weights such as Komatsu, Caterpillar, Volvo and Hitachi. As the world grapples with the fallout from COVID-19, customers will increasingly look towards industry champions from China.
Sany has a $10 billion market cap with a fraction of the sales of larger global leaders. The company trades at a pre-teen multiple of earnings and has a healthy 2.9% dividend yield and steadily improving return on equity. The company also generates solid free cash flow and has net cash on the balance sheet to help support go forward research and development and new product expansion efforts. We believe this company benefits from many of the regulatory changes coming in China around improved emission standards and continued infrastructure growth. Additionally, there is a sizeable international growth opportunity with China’s Belt and Road Initiative (BRI). Once countries start to “flattened the curve” globally, we can expect many of them to follow in China’s footsteps and resume business activities such as construction. Thus, we view construction equipment companies such as Sany positively. While it’s true that we, at Wealhouse, are never ones to subscribe to a quick trend, at the end of the day, Sany is still a company with an excellent balance sheet and cash flow projection, growth opportunities of revenue and dividends, and strong ownership, all of which ticks off our investment checklist.