Hong Kong: Investors should buy shares of companies tied to infrastructure spending in Asia as economic growth and urbanization boost earnings of companies such as Shenzhen Chiwan Wharf Holdings Ltd, Merrill Lynch & Co said.
Asian countries are likely to spend more than $600 billion in the next three years on roads, ports, railways, airports and power stations, according to Stephen Corry, a Hong Kong-based regional strategist. Asia’s urban population is expanding by 33 million every year, he said.
“That’s the equivalent of four New Yorks every year, which is absolutely colossal,” Corry, 36, said in an interview on Monday. “Infrastructure shortfalls do seem to be prevalent for the entire region. The story remains pretty good throughout Asia.”
Apart from Shenzhen Chiwan Wharf, a port operator in southern China, Merrill’s top picks include Bharat Heavy Electricals Ltd (Bhel), India’s biggest electrical equipment maker, and Singapore’s Keppel Corp., the world’s biggest builder of oil rigs.
Economic growth in countries such as China and India, home to 2.4 billion people, is expected to exceed world growth this year, according to International Monetary Fund estimates. China will expand by 10% and India by 7.3%, more than overall global growth of 4.9%, IMF said on its website. Developing economies in Asia such as Malaysia, the Philippines and Sri Lanka will grow 8.6%, IMF said.
“If you look around the wor- ld, it’s hard to see any part that has had the type of growth that Asia has,” said Peter Gunning, Asia Pacific chief investment officer at Russell Investment Group, which has $200 billion of global assets. “People are buying the growth story.”
Elections in the next 18 months in countries including South Korea, Taiwan, Thailand, the Philippines and Malaysia will help boost spending as incumbent governments promise more projects to attract voters, Merrill’s Corry said.
China’s economy has expanded at an average annual rate of 9.7% since 1992. Urban fixed-asset investments swel-led by almost 27% to 7.9 trillion yuan ($1.02 trillion) in the 11 months through 30 November, according to the Chinese National Bureau of Statistics.
“When people think infrastructure in Asia, they think China, China, China,” said Tim Rocks, Macquarie Securities Ltd’s Hong Kong-based Asian equities strategist. “The numbers are mind-boggling.”
The world’s most populous nation is spending an estimated $160 billion on sporting stadiums, athlete quarters, a new airport terminal, roads and metro rail systems for Beijing in preparation for the 2008 Olympic Games.
China has also built the world’s largest container port, a $16 billion reclaimed island outside Shanghai able to handle 15 million containers a year by 2010 to compete with Hong Kong and South Korea’s Busan as northern Asia’s main trans-shipment harbour.
David Cui, a Merrill Lynch analyst, started covering shares of Shenzhen Chiwan Wharf last month with a “buy” recommendation and a 12-month share-price target of HK$22.80. Its Shenzhen-listed shares have climbed 4.7% this year to HK$16.20.
India is also seeking to upgrade its infrastructure to cope with economic growth, which the government wants to accelerate to 10% by 2012. The economy has grown an average 8.1% in the past three years. Prime Minister Manmohan Singh in October doubled the estimate of investment needed in roads, ports and other infrastructure to $320 billion in the next five years.
“The pure economy has been growing 8-9% annually for the past few years and it can’t support the expanded capacity all the companies over there are putting out,” said Corry. “There are some great factories over there but nothing to get the products out to the market.”
Economic growth is straining power generators in India, where blackouts are common in some large cities. The country wants to build at least four so-called ultra-mega power plants of 4,000MW each to meet demand.
The new plants are likely to benefit Bhel, whose shares have fallen 6.3% this year. It has still outperformed the Sensex’s 9.7% slide.
The New Delhi-based company in February won a Rs144 crore order from Power Grid Corp. to set up a 400kv power transmission substation in the western state of Maharashtra.
Keppel may also benefit from demand in India. Oil companies are expected to invest at least $6 billion to expand the country’s oil and gas fields, M.S. Srinivasan, secretary of India’s oil ministry, said on 8 February.
Singapore-based Keppel is expecting “strong” orders as India and Brazil open oil and gas fields in their waters, senior executive director Choo Chiau Beng said on 13 February. Shares of Keppel have gained 8.5% this year.
Merrill’s Corry says two risks for the infrastructure theme are attracting enough foreign partners to help construction and to finance these developments. Even so, he’s not overly concerned—there’s enough demand for assets in the region to benefit companies such as Chiwan Wharf, Bhel and Keppel, he said.