Interview with Paul Goodwin, Editor of Cabot China & Emerging Markets Report
October 29, 2007
Transcript:
WSR: Cabot China & Emerging Market Report. The Chinese markets are soaring into the stratosphere right now. Everyone wants to know how much more they can grow.
GOODWIN: The Cabot China & Emerging Markets Report is a technically based report. We spend a lot of time looking at the charts of the stocks that we are following. We don’t spend much time trying to predict what the markets are going to do. Since we can’t control the markets, we look at what we can control, which is our response to what happens on the charts. I don’t see any real impediment to the Chinese market’s continued growth, although they took a little dip the other day when it was announced that GDP growth eased back to 11.5% in the third quarter versus the record 12% from the second quarter. 12% to 11.5% growth isn’t going to have much of an effect on stock. That’s what we are concerned about. That’s what we keep our eye on.
WSR: Do you follow the charts of the major indices to see if they look technically sound, or just individual stocks?
GOODWIN: We use the Halter USX China Index as the basis for our market timing because the report actually uses the BRIC strategy with Brazil, Russia, India, and China. It works quite well as a proxy for the wider Chinese market, at least Chinese ADRs, American Depository Receipts, which are the kind of representative equities that you can buy on US exchanges. As long as the value of the Halter USX Index remains above the lower of its two moving averages, we regard that as being a bullish sign.
WSR: Is it above those right now?
GOODWIN: Well above them.
WSR: If the US experiences an economic slowdown, will China continue to grow as rapidly?
GOODWIN: We are one of China’s largest customers. If the US experiences a significant recession, of course that will have some effect on China. However, as many have pointed out, it’s the relative cheapness of Chinese goods woven through Wal-Mart and every other retail outlet in the US that has allowed American consumers to buy large amounts of goods relatively cheaply, which helps to control US inflation. There are other countries and other regions in the world that will probably pick up some of the slack. We don’t do a lot of predicting, but we do imagine that if the US slows down, China will slow down somewhat. It won’t be as drastic as it would have been. Before China emerged, the economy of Japan was almost parallel to it because we were their largest export customers, especially for automobiles and technical goods. China has great economic relationships with the US, Japan, India, and all of Europe. It will be statistically significant, but it won’t be a one for one kind of influence if the US goes down.
WSR: Companies in emerging markets, China in particular, have a reputation of delivering some doctored financial information. How do you identify companies with accurate accounting practices?
GOODWIN: We only invest in companies that trade on major US exchanges as ADRs. In order to list on the New York, the Nasdaq, or even the American, these companies have to conform to Generally Accepted Accounting Practices. Of course, companies can still doctor their books. I recall a company called Enron that did a pretty good job of that. A company that wants to make the bottom line or the topline look better than it is can always just lie, but it hasn’t been a great problem. We did have one of our portfolio holdings, LDK, their Chief Financial Officer quit and sent him on the way out the door he (?) a few nuggets with some financial reporters saying that they had been overestimating their inventory and the stock dropped about 50%. People are concerned about this. It can be a problem, but when any such thing is brought to light, the stock reacts quickly. In general, it hasn’t been much of a problem for us. It seems that they are reliable enough. Since we have similar doubt, sometimes for American companies, it just becomes part of the landscape.
WSR: Let’s talk about some of your recent recommendations. Tell us how you came across them and what you think the future is. The first one came out of your more recent newsletter, it’s called E House, symbol EJ, listed on the New York Stock Exchange. What does this company do and where is it going?
GOODWIN: E House is a real estate company in China. There are two parts to its story. First, it is involved in the usual sort of brokerage business. It has, thus far, mostly partnered with development firms. Development firms build condos and apartments. E House provides the marketing muscle so those apartments and condos can find buyers and lenders. That’s been doing quite well. That’s the primary market. The expectations are that, as the Chinese real estate market matures somewhat and people begin to sell the houses, they will also be moving into the secondary market. The more important factor is that E House has begun an online database, the equivalent of the US Multiple Listing Service (MLS). Whereas the MLS is run by the National Board of Realtors in the US, E House owns it in China. E House is now in about 20 cities, with 2,500 sales professionals. The expectation is that the Multiple Listing Service equivalent for China will become more and more valuable. It will become a revenue source for them as well. That’s the reason the company is getting as much action as it is. The company just went public in August. We usually wait a little longer, as we like our stocks to have a little more history than that. We like to find stocks that have access to the largest possible markets in China, like China Mobile and China Life Insurance. E House was the first opportunity we had to invest in something that had exposure to the Chinese real estate market. That’s why we picked it.
WSR: What price did you recommend? Where do you think it’s headed in the future?
GOODWIN: We recommended it at about 28 and it is now top 30. Fundamentalists are usually the ones that try to figure out where a stock ought to be. As technical analysts, we follow the charts and try to see where it is. E House went public at 14 in early August. It dropped a little bit, sort of a traditional post-IPO droop, then it took off and hit about 28. That’s when we really got interested. Since then, it has moved up to 30. It seems to be in good shape. Volume trends are good on buying weeks. We like it a lot.
WSR: One of your recommendations from earlier in the year is Mindray, symbol MR, also listed on the New York Stock Exchange. Would you tell us a little bit about this company?
GOODWIN: Mindray Medical is a manufacturer of diagnostic and ultrasound imaging equipment. Major hospitals in the US generally tend to restrict themselves to either Siemens or GE when they buy imaging machines or MRI’s. Those are the premier machines, everybody recognizes that. However, Mindray, after developing these machines, simplifying the technology, and then selling them to hospitals and clinics throughout China, has gone international. It’s selling them in Europe and the US. While the major medical centers can’t be bothered, there are a lot of regional and local hospitals and clinics in the United States, for whom saving thousands of dollars on machines like this is an important consideration. Mindrays is trying to compete on price for secondary markets in the US and Europe. It has been going well. In the past three years, their sales have risen 52%, 57%, and then 45% in 2006. Earnings have also been doing well. They show a 31% after-market, after-tax profit margin. That’s an attractive proposition.
WSR: The chart hit a high in late September, over $44. It has pulled back to the $39 range. Technically speaking, what does that mean for the stock? Is it testing any of its moving averages? Where is the support?
GOODWIN: Yes. It has pulled back nicely to its 50-day moving average. Part of this has come as the market has been volatile, as you know. One of the characteristics of the Chinese market, especially in stocks like Mindray and E Health that aren’t the big market key names, is that, as things happen in the US that make investors nervous and raise risk intolerance, there is a lot of hot money in China and that money will jump out and could be as it jumped in. There is a lot of institutional money there, too, which was there on a much more long-term basis. There are a lot of individual investors who are just riding the heat. That’s the money that provides volatility, because when anything happens that they don’t like, they can drop a stock pretty well. This particular decline provides a good buy point for Mindray. Frankly, finding good buy points in Chinese stocks can be tough. I think China Mobile and China Life (LFC) are a couple of the real premier stocks there. China Mobile has more subscribers than any mobile phone company in the world. China Life is the dominant life insurance company in China. We like them because they have exposure to an enormous demographic in China. Things like that are perhaps a little less volatile and do quite well as the institutions continue to pile into China. The outliers like Mindray and E House can provide a little more alpha. If you guess right, they can really send your performance up. The China & Emerging Markets Report was the number one letter for performance in 2006. It has remained number one up through the end of September. Our performance for 2006 was 76%. For the trailing 12 months, ending in September, it was 77% or 78%. It’s a good market to be in.
WSR: Tell us a little bit more about the newsletter. If someone wants to look into it a little bit further, is there a website they can go to?
GOODWIN: Absolutely. Just go to www.Cabot.net to find all you need. The newsletter comes out every two weeks. Subscribers get an update on the stocks that we cover. It’s very simple. It’s commentary about what has been going on in China. There’s a stock recommendation each time, and a review of our portfolio holding. We won’t make a move in the portfolio without letting our subscribers know. So, if there is something that we -- as LDK Silver(?) did, if there is something that deteriorates, we will put out a special hotline by e-mail and let people know that it’s time to get rid of it. We are also one of the only newsletter companies that allows subscribers to call and ask about stocks. We don’t confine ourselves to the stocks in our portfolio; people can call and ask about any stock they want. It’s a great service. As technical analysts, all we have to do is pull a chart. Although we can’t give advice on the first day, we can sometimes say what we would do under the circumstances. If people want to know if a stock they have has a buy point or needs selling, that’s the kind of thing that we can talk about. END
Wall Street Reporter, established in 1843, interviews CEOs and top investment experts for its website, magazines and conferences.
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