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Trade Alert: Profit From Growth on the Silk Road

I have been thinking in recent months about relocating my life to Europe, specifically Eastern Europe, where the feel of Old Europe — Europe as it’s supposed to feel — remains strong. And I have to say, Warsaw, Poland, where I landed Thursday afternoon, is high on the list of possible settlements (along with Tallinn, Estonia and Budapest, Hungary).

This is my second arrival in Warsaw in the last two years, and I can feel that the energy of the place is even higher than it was in the winter of 2013. Dinner last night at a Michelin-starred restaurant (I was invited by the owner for some research I’m doing) was the kind of meal you store in your mental hard drive to recall later as one of life’s great food moments. The point, though, wasn’t so much the meal but the very reason a Michelin-starred restaurant can even exist in this former commie country in the first place: The explosive growth of middle-class wealth that didn’t exist even a generation ago but now has put Poland on the map as one of the strongest economies in Europe.

Seriously. Poland. The place that has long been the butt of jokes, and a part of Europe that across the span of history has barely had any time to itself, always the victim of someone else’s land-grab — be it Russians, Prussians, Soviets, Austro-Hungarians or others. Today, it’s the envy of a continent.

And it has the eye of arguably the most important economy in the world of tomorrow: China.

Opportunity on the Silk Road

China, as I’ve mentioned previously, is in the process of rebuilding the famed Silk Road that once connected the Middle Kingdom to the middle of Europe, creating what was at the time the single most important trade corridor in the world.

The new Silk Road, what China refers to as its “One Belt One Road” policy, is once again deeply connecting Asia and Europe, uniting what are two of the three most important economies in the world. Clearly, U.S. trade isn’t going away … but trade between China and the European Union is destined to become the largest in the world. And Poland, which has historically served as a door connecting East and West, will play a part. Indeed, two rail lines opened in 2013 linking Łodz with Chengdu and Warsaw with Suzhou, underscoring Poland’s role in the One Belt One Road philosophy.

We’re going to play this One Belt One Road trade through China itself by owning Jiangnan Group (HK: 1366).

Jiangnan is the market leader in mundane cable and wire products that go into China’s power grid. Thing is, China is expanding its power grid dramatically to fuel the industries that drive the new Silk Road … and it’s powering the Silk Road itself. China announced this year that it will spend almost $70 billion expanding the country’s power grid, including work that will take Chinese power into economies that are key to the Silk Road: Russia, Kazakhstan, Mongolia and Pakistan.

Jiangnan will profit from that since it is strongly tied to the various state-owned enterprises that control China’s power-generation industry. And the company is opening sales offices in places such as Pakistan, Russia and elsewhere to capitalize on this trade.

It will also benefit from ongoing efforts to generate cleaner energy through China’s increased construction of extra-high voltage and ultra-high voltage transmission solutions that will take more power farther from its source, ultimately reducing demand for coal. Lots of wiring and cable are required.

A Solid Foundation

Financially, Jiangnan is in a net-cash position, meaning it has more cash than debt on its balance sheet, giving it a solid base from which to expand and grow organically or through acquisitions, which it wants to do.

And the shares are cheap, in large part because of the Chinese market sell-off (tied to A-share investors in Shanghai who mean less than zero to the real Chinese economy). Jiangnan will grow earnings by about 20% a year for the next two or three years, at least … and yet the shares trade at less than seven times the per-share earnings the company should report this year.

Plus, we’re capturing a dividend of about 3.5%. Not massive, but enough to be meaningful in a no-income world.

The shares closed overnight at HK$1.79 (US$0.23). But given the growth, I put a P/E multiple of 10 on these shares, which means that if Jiangnan earns the roughly HK$0.29 per share that it should earn for 2016, we’re looking at a share price in the HK$2.90 range — a potential gain of more than 60% before accounting for the dividend.

So, action to take: Buy Jiangnan Group (HK:1366) up to HK$1.90

Until next week, keep a global view…


Jeff D. Opdyke
Editor, Profit Seeker