Stock Benefits from China’s Hunger for Steel

A month ago I promised you a few thoughts on the Olympics … so here they are.
 
First, as we head toward the opening of the Beijing Olympics, I’m enjoying the absence of the typical hand wringing about the cost of the event and the worrying about whether the facilities will be completed in time.  For as long as I can remember, the months before the Olympics have included such public questioning.  But the Chinese government is running a tight ship; there is no doubt the venues will be ready.  And while the cost, at $43 billion, is nearly triple that of the last Summer Olympics in Athens, Greece, it’s not a problem; the Chinese in general are proud of the opportunity to strut their stuff for the world.
 
The big question for these games, interestingly, is the quality of the air.  I was in Beijing 16 months ago, and I know how bad the pollution can be.  But I have faith that the Chinese government will clear the air enough–through plant shutdowns and perhaps even cloud seeding–to permit normal athletic participation.
 
Then there’s the politics.  Some people want to boycott the games, or at least the opening ceremony–to protest China’s human rights shortcomings.  I say keep the politics out of it.  Celebrate the athletes.  The modern Olympics were designed to bring nations together by allowing youths to compete in sport, instead of in war, and allowing politics to intrude would only subvert that goal.

A Radical Proposal
 
As to the events themselves, in Beijing there will be 302 events in 28 sports (more if you break it down into sub-categories), ranging from archery to judo, table tennis to volleyball.
 
Here’s my radical idea.  I think the Olympics should be restricted to sports where the result can actually be measured.  The reason?  Events where subjectivity is involved are too easily politicized, by judges who–all too humanly–favor the pretty, the veterans, and–of course–the competitors from their own counties, while penalizing the plain, the young and those from unfriendly countries.  The original slogan of the Olympics was Altius, Citius, Fortius (Higher, Faster, Stronger), not more gracefully, more complexly or more artistically.  Events such as diving, rhythmic gymnastics, synchronized swimming and trampoline are all vulnerable to human subjectivity.
 
Mine, of course, is a minority opinion; in fact, I believe I’ve never heard anyone else espouse it, so it’s more correctly called a “fringe” opinion.   I have no doubt the subjectively judged events will persist at the Olympics for decades to come, in part because Americans love the diving and gymnastics.  Me, I like cycling, the traditional track and field events, and I’m looking forward to the return of long-distance swimming with the 10K open water marathon.
 

 
Watching the Tour de France

Speaking of cycling, I spent a lot of time on bicycles when I was young.  In fact, the only bone I ever broke was in a bike race.  Riding through a five-way intersection, I collided with a red station wagon, went over the handlebars and scraped across the roof rack.  Next thing I knew I was sitting on the sidewalk with a broken collarbone.  A year later, older and wiser, I came back and won the same race.
 
Today, my cycling is mainly confined to watching the Tour de France, which concludes in Paris this Sunday.  I record it as it’s broadcast live every morning, and watch it at night, skipping the oh-so-repetitive commercials and turning a three or four hour race into a show that can be watched in less than two hours.  My wife happily watches with me, but most Americans are oblivious to the 21-day race, which many call the toughest sporting event in the word.  And that’s a good thing, because throughout the entire day, no one blurts out the winner of the day’s stage accidentally.
 

 
Finally, a few interesting Olympic facts.
 
The official starting time and date of the Beijing Olympics is 8:08:08, 08/08/2008.  Eight is considered a lucky number in China.
 
There will be about 10,500 athletes at the Beijing Games and about 20,000 accredited members of the media.
 
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For today’s stock, I’m sticking with the China theme.  My recommendation is a mid-sized ($1 billion in revenues) steelmaker named General Steel Holdings (GSI).
 
Here’s what Paul Goodwin of Cabot China & Emerging Markets Report wrote a month ago in that publication:
 
“China’s appetite for steel is enormous, gobbling up about one-third of the world’s output every year.  The country is also no slouch as a producer, turning out about a third of the world’s yearly total.
 
In an environment of consolidating giants and government planning, there is one small company that has found a profitable strategy and is growing strongly.  It’s General Steel Holdings, one of the largest non-government-owned steel makers in China.  The company is thriving by acquiring rivals and installing Western-style management to increase efficiency.
 
General operates through three major subsidiaries, including 1) Tianjin Daqiuzhuang Metal Sheet, a maker of hot-rolled carbon and silicon steel sheets that are used to make tractors, agricultural vehicles and shipping containers.  2) Baotou Steel Pipe makes spiral-weld steel pipes for oil and natural gas and petrochemical markets.  3) Longmen makes pig iron, crude steel, re-bar and wires.
 
For a company like General to break out of the pack, there must be a distinguishing advantage, and the income statement would indicate that management is making the difference.  The company’s managers have shown that they can deliver on their strategy of growing through acquisition, with EPS increases over the last four quarters of 500% (Q2 ’07), 2400%, 750% and 200%.”
 
I look at the chart and I see a stock that came public in October 2007, peaked at 19 two days later, coinciding with the broad market’s top, and then declined to build a broad bowl formation that bottomed at 6.  When Paul wrote about the stock a month ago it was selling at 13 and trending up.  Today it’s 15.  I think it will hit its old high of 19 in time, and eventually break out to new highs.
 

 
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Yours in pursuit of wisdom and wealth,
 
Timothy Lutts
Publisher
Cabot Wealth Advisory

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