China remains a battleground country among investors. Not a day passes without articles appearing in the Western media about ghost towns, corruption, pollution, bad treatment of immigrant workers, empty trains and bad roads. Bears on China argue that it’s a massive bubble getting bigger by the day. Bullish investors contend that the country is undergoing profound change, but that these changes will be seen only over the long term.
One of the less controversial ideas is that Chinese people love cars. Car ownership is rising rapidly and virtually all automakers around the world are scrambling to get a piece of the pie. Apart from companies such as Tesla and some other relatively small electrical vehicles such as Chinese BYD, most cars run on oil. As a result China’s demand for “black gold” continues to rise rapidly.
The Chinese oil industry is dominated by state-owned enterprises such as PetroChina (ticker: PTR). Several years ago Warren Buffett invested in the company and at one point owned over 3% of the outstanding shares. In 2007 he cashed out at a large profit after a run in the stock. Recently the company has been languishing and its executives accused of graft, creating a potential interesting opportunity for contrarian investors.
PetroChina, China’s largest fully integrated oil company, was founded in 1999 and is no longer only a Chinese story. As the Chinese hunger for hydrocarbons continues to grow PetroChina, is on a constant quest to satisfy Chinese oil demand.
PetroChina pays a large dividend of $5.22/share, which gives it an expected dividend yield of 4.5%. Earnings are expected to grow by 10% to 12% in both 2013 and 2014. PetroChina doesn’t look expensive judging by its low price-to-book ratio of 1.1 to 1 and stock valuation of less than 9.8 times expected earnings. The balance sheet looks reasonable with a net debt ratio of 40%.
PetroChina isn’t without risks. Some of its top management recently were charged with potential fraudulent activity. PetroChina is also shunned by many high-profile investors for humanitarian reasons, as it does business with warlords in Sudan. And large slowdown in the Chinese economy, as advocated by hedge-fund managers such as Jim Chanos, would lead to much lower demand for oil. Considering the big pollution problem in China, any crackdown on the use of fossil fuels might hinder PetroChina’s profitability.