The Case for Investing in Chinese Commodity Producers

Many asset classes around the world are overvalued right now, but I recently watched a video with Mike Maloney and Ronald-Peter Stöferle (of Incrementum AG) with the latter showing a chart we may be back to 2000 valuations for commodities.

The chart above represents the ratio between the SPGSCITR commodity index (aka S&P GSCI) against the S&P 500. It just shows stocks are really expensive compared to commodities.

And if we look at the long term chart of the GSCI commodity index courtesy of trading economics, commodities are indeed back to price not seen since the end of the 90's.

Great! Let's find a GSCI ETF tracker and we should get a nice return you may think. But not so fast, as you may remember commodity ETFs are usually terrible investments due to the contango effect. But let's double-check as in the US, there are two ETF's tracking GSCI: GSP and GSG.

Those are down around 70% since May 2016. The GSCI index is also down since that time, but only about 60%, It's not that bad considering the ~15 years time frame.

However, my brokers won't let me invest directly in ETF's in the US. So instead, I looked at mining stocks like BHP and Rio Tinto listed in the US.

While both stocks are well below their peals in 2006 or 2011, they have recovered a lot since the bottom in early 2016.

So I went looking for other opportunities in the Hong Kong stock market (Hang Seng). There aren't any commodity ETFs anymore apart from Gold based ones. So we can look at the charts, earnings, dividends and P/E of some of the commodity producers. It's always more risky to selecting individual stocks, especially those depressed, as they may go bankrupt, so I personally prefer to focus on larger companies.

Petrochina 0857.HK

We are back to the year 2014 price. The company is still making profits (0.33 HKD EPS), and paid a 4.6% dividend last September. With a one trillion market capitalization, it's one of the biggest companies in the world. There may be more downside, but patient investors will be rewarded by the dividend and potentially higher price in a few years.

Sinopec Shanghai Petrochemical Company Limited (0338.HK)

Sinopec is another large Chinese oil company back to 2014's prices. The dividend yield stands at 13.49% according to Yahoo (I suppose this will be revised down), and the company is still making a healthy 0.561 HKD profit per share. Market capitalization: 37.30 billion HKD.

China Coal Energy Company Limited (1898.HK)

Still a large (57 billion HKD) profitable (0.387 HKD per share) company, but probably more risky if the Chinese government really decides to scale down on coal-powered power plants. The company also pays a 3.28% dividend. The share price is really depressed well under the IPO price in 2006.

Sinofert Holdings Limited (0297.HK)

If you believe in the long term potential of agriculture, Sinofert looks promising. The company specializes in Potash which shot up in 2007/2008, and came down hard since then. The stock is really depressed at 0.80 HKD. But Sinofert is one of the largest fertilizer producers in China, is still making money (.075 HKD per share), and pays a dividend of 2.8%. The same could have been said in 2012 however, but the longer the undervaluation remains, the more the stock may gain when the market reassesses.

All those companies also have a price-to-book and price-to-sales well below 1, and they are very unlikely to go bankrupt. In the worst-case scenario, the stock price goes nowhere, but you still get paid to wait thanks to the dividend.

Do you know of any other HK listed commodity stocks that are paying dividends, depressed, and profitable? Let us know in the comments.