Capitalist Roader and Red Dragon funds: Reversing expectations

Capitalist Roader Fund:
The Shanghai Composite Index (SCI) declined 3.3% this week. Despite declaring a net profit up 40.9% in the first quarter of 2010, Huaneng Power (600011.SH) fell 3.2%, while Guangshen Railway (601333.SH) fell 2.6%; Guangshen’s first-quarter net profit increase of 3.1% to US$41.4 million didn’t do much to help, either. In fact, the only firm in the Roader’s portfolio to do better following positive earnings announcements was China COSCO (601919.SH), which rose 0.7% after the company returned to profit following five consecutive quarterly losses. The world’s seventh-largest shipping firm declared a profit of US$130 million in the first quarter of 2010 on the back of increased global demand.

Both Huaneng Power and Guangshen Railway were hit hard on Tuesday and did not recover before the end of the week. However, the profit growth of these companies indicates a sustainable path to benefit from an improved global economic outlook. As such, we continue to hold our entire portfolio.

The Capitalist Roader Fund is down 37.0% from June 3, 2008. The SCI is down 16.5% from June 3, 2008.

Red Dragon Fund:
As banks dropped to a desirable level, we made a trade on China Merchants Bank (600036.SH) for a small profit. We think China Merchants is still undervalued and we may buy in again should the market show signs of bottoming out. Meanwhile, our purchase of Shanghai International Airport (600009.SH) just above RMB17.00 proves that we are a little reckless. We may buy a bit more if the price slips to RMB16.00.

The market showed a meager rebound on the last trading day before the May 1 holiday, seemingly just to demonstrate what some observers have said – that recent rebounds only set the stage for a deeper plunge. The SCI will be testing 2,800 points soon, and we think the market will bottom out around this level. The coming days could be critical, with the market set to turn around.

The Red Dragon Fund is up 88.2% from August 19, 2005. The SCI is up 149.5% from August 19. 2005.

The Red Dragon Fund launched in August 2005 and is run by an industry professional. The Capitalist Roader Fund launched in June 2008 and is run by China Economic Review’s editorial team. Both funds are run solely as an editorial exercise.