Why Dow Chemical Wins, Caterpillar Loses on China’s State Asset Selloff

BEIJING (TheStreet) -- A new phase for China's asset cash-out is under way with big implications for the country's economy and China Inc.'s American competitors.

One way to play the Chinese government's decision on Tuesday to sell stakes in six state-run conglomerates, on top of the Sinopec (SHI) and China Telecom (CHA) assets that have been on the block since earlier this year, is to invest in rivals with Asian footholds such as Dow Chemical (DOW) and Kraft Foods (KRFT).

The government very well could fail to find private buyers willing to sink money into conglomerate subsidiaries such as liquid-crystal display chemical maker Valiant, whose competitors include Dow's electronics supplier unit, and packaged-food divisions of the conglomerate Cofco Corp., whose goods share Chinese supermarket shelves with Kraft products.

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State companies no one else wants because of outdated factories or changing consumer tastes could be closed. That's what happened during the 1990s when old steelmakers shut down across northeast China, to the delight of their South Korean rivals.

Sinopec's current situation highlights the possibility of failure for assets offered through project: The petrochemical giant has yet to announce an outside investor for a chain of 30,351 gas stations on offer since February. China Telecom started seeking Internet-related business investors in May.

From another perspective, the latest selloff plan announced by the state-owned Assets Supervision and Administration Commission can be read as a commentary by insiders -- that is, government officials in Beijing -- on the state of the nation's slowing economy.

For example, the plan suggests it's time to look hard at investments tied to the Chinese construction business. American companies that sell construction machinery in China include Caterpillar (CAT) and Terex (TEX).

Two of the six conglomerates set for asset sales are urban infrastructure pipe manufacturer China Xinxing Group and China National Building Materials Group, whose companies make everything from glass to cement. The latter's Beijing New Building Materials division made gypsum board for the 101-story Shanghai World Financial Center and the Bird's Nest Stadium, built for the 2008 Summer Olympics in Beijing, which today stands empty.

Another targeted conglomerate, State Development and Investment Corp., has a unit that's building a coal-fired power plant in the Gobi Desert near the remote city of Hami, which the government has been trying to grow with limited success. Peabody Energy (BTU) has invested in nearby coal mines. Caterpillar sells mining machinery in China.

Other conglomerates on the list are Valiant's parent, China Energy Conservation and Environmental Protection, and drug maker Sinopharm. The government started planning selloffs last year, but has announced no firm timetable for deals.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates DOW CHEMICAL as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate DOW CHEMICAL (DOW) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance and reasonable valuation levels. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Chemicals industry. The net income increased by 65.2% when compared to the same quarter one year prior, rising from $635.00 million to $1,049.00 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 7.2%. Since the same quarter one year prior, revenues slightly increased by 0.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.67, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.21, which illustrates the ability to avoid short-term cash problems.
  • Powered by its strong earnings growth of 71.73% and other important driving factors, this stock has surged by 51.28% over the past year, outperforming the rise in the S&P 500 Index during the same period. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.

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