Yanzhou Coal (YZC) - A Chinese Value Stock?

I have been watching with interest from the sidelines as alternative energy stocks have skyrocketed in recent months, partly wishing that I was riding the wave and partly quite content in the knowledge that there will be plenty of opportunity to make money in alternative energy in the future. My biggest concern at this point is that not all alternative energy stocks are created equally, a good number of them will fail, and ultimately which ones succeed may come down to politics. I don't yet feel confident enough to separate the wheat from the chaff, particularly as many alternative energy companies are not yet profitable, so I will continue to watch with interest and research companies that I feel stand out from the crowd.

So if I'm not yet investing in alternative energy, what am I focusing on? While I fully expect renewable and green technologies to play an increasing role in energy production in the future, I am still a firm believer that coal, oil and natural gas will remain the major sources of energy in the intermediate term. I also expect nuclear power to feature strongly, but that is a topic for another day.

You see, the problem with alternative energy, while highly desirable, is that it is expensive. In comparison, coal is cheap - very cheap. Yes, it is dirty, yes, the environmentalists don't like it, and yes, there is pressure to reduce its use in the US, but I don't feel that any of those issues are going to matter until alternative energy can begin to compete on price.

The other huge issue is that China is the world's largest coal producer and consumer, and they are not going to stop burning coal any time soon. In fact, China plans to build stockpiles of the fuel in the eastern province of Shandong to ensure supplies and help stabilize prices. At this point China is self-sufficient in coal, but there may come a time soon when it is a net importer of coal.

If you are looking for a coal play that bets directly on China, then Yanzhou Coal (YZC) fits the bill. Yanzhou is one of China’s largest coal suppliers producing high-grade, low-sulfur coal, which burns cleaner and therefore fetches a premium price. Yanzhou Coal (YZC) is principally engaged in underground coal mining, preparation and processing, sales, and railway transportation of coal. The company is organized into three operating divisions: coal mining, coal railway transportation and methanol and electricity power. The company operates six coal mines: Xinglongzhuang coal mine, Baodian coal mine, Nantun coal mine, Dongtan coal mine, Jining II coal mine (Jining II) and Jining III coal mine (Jining III), as well as a regional rail network that links these mines with the national rail network.

So Yanzhou Coal (YZC) is in a great position to benefit from China's growing demand for coal, and also from any additional infrastucture investment, but what are the fundamentals like? Despite the recent upward movement in the share price, I believe that Yanzhou Coal remains a value stock with plenty of potential upside.

The company has low debt, has shown excellent growth in recent years, and pays a 4.2% dividend. Yanzhou Coal (YZC) currently trades at a P/E of 7.4 and a price/book of 1.8 with a current ratio of 2.83. The company boasts a return on equity of 26.9% and a gross margin of 50%. The company currently trades at $14.85 and I would be looking for a 12-month price target of $25-27.

Disclosure: At the time of writing the author held shares in Yanzhou Coal (YZC).

China Fire & Security Group - CFSG

China Fire & Security Group (CFSG) supplies industrial fire safety products and systems to companies in the iron and steel, power and petrochemical industries in China. The company today announced fourth quarter results which beat analyst estimations, showing increased revenue and earnings. The company is in a strong financial position with no debt and a healthy cash flow.

In the past, China has not been known for its strong track record in the arena of health and safety, but as the country continues to show tremendous growth, it makes sense that they will endeavor to protect their investments. Companies like China Fire & Security Group (CFSG) should flourish as a result. Interestingly, the company has a high insider ownership and yet has almost a 10% short interest.

China Fire & Security Group (CFSG) has been on my watchlist for several months as it is in a strong position to benefit from any government infrastructure spending and stimulus efforts in China.

Disclosure: At the time of writing the author did not hold shares in China Fire & Security Group (CFSG).

Highveld Steel and Vanadium - HSVLY

Highveld Steel and Vanadium (HSVLY) provides good exposure to the commodities sector, while at the same time giving the investor significant dividend income. While I don't expect the huge dividend to be maintained at this level indefinitely, it is unlikely to ever be cut completely.

The price of HSVLY stock has suffered in recent months falling to a 52 week low of $4.75. HSVLY currently trades at $7.20, well below the 52 week high of $24.94, which I believe presents real value as the stock has been heavily oversold. Highveld Steel and Vanadium (HSVLY) is among the most solvent and profitable mining companies, and will benefit strongly from any infrastructure programs put in place by the incoming Obama administration.

Highveld Steel and Vanadium (HSVLY) currently trades at a trailing P/E of 3.50, with very little debt, and I anticipate a 12-month price target of $16 as the economic outlook improves in the second half of the year.

Disclosure: At the time of writing the author did not hold shares in Highveld Steel and Vanadium (HSVLY).