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Comment of the Day

July 26 2013

Commentary by David Fuller

Email of the day

On ###### ####### ##### machinery companies
"Hello David, I hope you are well.

"Could you please comment on the China H share-listed construction machinery companies, such as Zoomlion and Sany, and also the China coal sector, such as Yanzhou, Shenhua, and China Coal Energy?

"These sectors have all taken a beating in the last few months, and I wonder if they are set up for a rebound? Fundamentally, construction machinery companies are trading at low single digit P/Es and around 1x P/B. Coal companies are also (much) lower single digit P/Es and well below 1x P/B, levels that surpass even '08 valuation lows.

"These companies look cheap and the technicals look interesting, but as any investor with the finger on the trigger is wondering, am I missing something?

"Thanks in advance for your thoughts."

David Fuller's view The shares are interesting because they are quite overextended and show some initial evidence that downside momentum is waning, as you can see from these weekly 10-Yr (where possible) charts of Zoomlion, Sany, Yanzhou, Shenhua, and China Coal Energy. Valuations are certainly cheap on historic earnings, as you point out, although the estimated P/Es are somewhat higher (Sany excepted, according to Bloomberg) so fundamentals have deteriorated.

As you know, a cheap share can become expensive without recovering if earnings really deteriorate. Today, coal is a pariah industry although presumably less so in China. Nevertheless, coal only regained half its 2008 peak price before weakening once again.

To answer your question, technically, these shares are set up for an eventual rebound, which should occur when China decides to support its stock market. You are closer to the scene and will probably know better than I when that is likely to occur. Meanwhile, on buying near these depressed levels you may need to be patient, but should be rewarded by the attractive yields, despite some risk that dividends could be reduced.

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