In The News
U.S. firms linked to China draw funds
http://www.usatoday.com
1/20/2004
By Matt Krantz
USA TODAY
While the boom in Chinese stocks is tempting investors with massive returns, the fear of getting shanghaied is holding many back.
It's easy to see why. Many of the big gainers have been stocks of Chinese companies that don't report their financial results each quarter as U.S. firms do.
That's prompting some investors to consider an alternative: U.S.-based companies that have tapped the booming Chinese economy and offer Chinese exposure while meeting U.S. accounting regulations.
Investors are eager to buy stocks tied to China because the rapid emergence of a middle class there is creating a more stable economy. But to minimize the risks from sudden changes in Chinese government policy or questionable accounting, investors are looking at U.S companies doing business in China such as:
Schnitzer Steel.(SCHN) Shares of this Portland, Ore.-based steel processor are up 312% the past year. It specializes in recycling steel from cars and other metal objects and turning the scrap into fist-size bits that can be reused. In 2003, about 25% of its revenue came from selling these scrap bits in China.
Chinese metal companies use the scrap to make steel girders and beams for bridges, skyscrapers and subway systems: "1.4 billion people are all trying to improve their lifestyles," says CEO Robert Philip. "We are tied to a country that's growing."
John Rogers of D.A. Davidson, the lone analyst covering Schnitzer, thinks its 2004 earnings will grow 36%. If so, that means Schnitzer trades at 15 times 2004 earnings, vs. 18.5 for the Standard & Poor's 500.
UTStarcom.(UTSI) China also is upgrading its telephone network, which has created a big opportunity for this Alameda, Calif.-based telecom company that has seen its shares rise 63% the past year.
UTStarcom gets 80% of its revenue from China, and 4,000 of its 5,000 employees are based there. That heavy exposure to China is paying off, because while telecom carriers in the USA have slashed spending on new gear, Chinese telecom firms can't buy enough.
To tap this market, UTStarcom has two key products: gear that lets wireless phone users in China roam without any disruption; and equipment that allows Chinese telephone companies to offer high-speed Internet access to their customers.
UTStarcom has been in the Chinese telecom market since the early 1990s, says Michael Sophie, the company's chief financial officer. "Now, it's the largest telecom market in world," he says.
Analysts expect UTStarcom's 2004 earnings to rise 15% on top of a 73% rise in 2003, says Thomson First Call. Still, the stock trades at 20.3 times 2004 earnings.
Chindex.(CHDX) Shares of this Bethesda, Md.-based supplier of medical supplies and services to China have soared 966% the past year, and the company's revenue has been growing by 20% a year as the demand for Western medicines rises. More than 200 hospitals in China have bought equipment from Chindex, ranging from ultrasound to X-ray devices.
But Chindex also shows how even U.S.-based Chinese plays have risks. Its market value is only $79 million, and no analysts track it, First Call says.
Also, while these are U.S. companies, much of their revenue depends on one country where the economy could overheat or stall under political changes. But many think the potential rewards are worth it. "This economy will change the world," says Tim Halter, managing director of The Halter USX China Index.
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