A robust addition to the China pot

China is suffering from a credit crunch to rein in raging inflation. However, its stop is our go, and when its austerity programme is over, you know that China is still likely to be one of the fastest-growing economies in the world. An obvious place to invest, if you can find the right shares at the right price.

In recent months, international investors have been attracted to Hong Kong as a way of participating in China's growth. As a result, the market has risen substantially, taking the average prospective p/e ratio in Hong Kong from 12.5 to over 15.

I am not so keen on the average Hong Kong share. I prefer Hong Kong companies with managers of Chinese origin who have guanxi (the Chinese word for connections), extensive interests in China, freedom from significant debt, high growth rates and low p/e ratios.

A tall order, you might think. But shares like this are still there if you know how to find them. You might remember that a few months ago I recommended investing a maximum of 15 per cent of your total portfolio in China with no more than 3 per cent in each of five shares. So far I have recommended Innovative International and S Megga. Now I have found another one - Yue Yuen Industrial, the largest manufacturer, in terms of Hong Kong market capitalisation, of branded sports and athletic footwear. Yue Yuen makes shoes for Reebok, Nike, Adidas, Prince, LA Gear, Converse and Champion, to name but a few of its customers. Yue Yuen also recently acquired the exclusive rights to distribute Converse shoes in China and has already established offices in five main cities there.

Products include basketball, aerobic, tennis, all-purpose and jogging shoes. By the end of 1994, the company should have more than 50 production lines and, from 1995 onwards, should be making more than 30 million pairs of shoes annually.

Yue Yuen's capitalisation is over HKdollars 4bn (about pounds 350m). EPS are expected to be 20 per cent up in 1993 and the consensus for 1994 is for growth of a further 26 per cent. Yue Yuen also has a strong balance sheet, with net cash in hand of more than HKdollars 120m at September 1992, the end of its last reported financial year. All new production facilities are expected to be funded from internal resources. It all sounds great, but there are two snags. The price of athletic shoes may be subject to a margin squeeze, especially in the United States. Also, trade sanctions could be imposed by the US and, as sales there amount to 66 per cent of turnover, that could be bad news for Yue Yuen.

However, the management is astute; it has set up four production lines in partnership in Indonesia, with another eight to be completed there in 1994.

At the current price of

HKdollars 1.87, on the consensus 1994 forecast of 24 cents EPS, the prospective p/e ratio is 8. It is also comforting to know that the forecast PCF (price to cash flow) is almost the same at 7.8.

As I mentioned earlier, the average Hong Kong prospective price/ earnings ratio for 1994 is about 15, but the average Hong Kong company includes substantial property and investment- dealing profits in its earnings and is still not expected to grow by 26 per cent per annum. I prefer Yue Yuen growing at 26 per cent next year (some leading brokers forecast more) on a p/e ratio of only 8 and with a forecast 1994 dividend yield of a highly attractive 6 per cent. The main risk is the imposition of trade sanctions by the US. If that happened, those Hong Kong property-based shares would tumble too, and they have a lot further to fall.

There are about 11.4 Hong Kong dollars to every British pound, so a price of HKdollars 1.87 is only 16.5p per share. Settlement for Hong Kong shares is within two days of dealing, so bear this in mind if you ask your broker to buy any shares in Yue Yuen International. He may tell you that dealing in Hong Kong shares can be difficult, but where else can you buy into China's future growth so cheaply?

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks before and after any mention in this column.

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