Tea Story

Date: Tue, 19 Oct 2010 12:43:38 +0800
Subject: Tea Story


Lady Astor:      “Winston, if you were my husband, I’d poison your tea.”

Churchill:         “Lady Astor, if I were your husband I would drink it.”

CHAI or CHA**?

Nipun Sharma initiates coverage today on the Assam Oil Company of India. Never heard of it? That’s because today it is known as ONGC. Although the recommendation is a thrilling “Hold,” there is much here worth watching. India’s premier upstream (and recently downstream) player, ONGC was organized under “Oil and Natural Gas Act,” in 1959 which states our concerns quite clearly:

“to plan, promote, organize and implement programmes for development of Petroleum Resources and the production and sale of petroleum and petroleum products produced by it, and to perform such other functions as the Central Government may, from time to time, assign to it “.

The last part means “government service” and the risk of state intervention remains high. We see oil moving to $100 next year which will cap India’s ability to liberalize diesel prices and stay in office at the same time. An interesting comparison is with CNOOC (883 HK, Buy). While both are state-owned upstream companies in two of the fastest growing energy markets, CNOOC is growing production growth like the proverbial weed through acquisitions and has a privileged business model with a heads-I-win tails-you-lose production sharing contract model with overseas oil majors in offshore China fields.

ONGC, however, has to compete with private and foreign players directly. CNOOC also escapes with a lower tax rate: 25% vs. 33% for ONGC. Trading at roughly the same PE of 12X, CNOOC offers a higher dividend yield, 3.1% vs. 2.8% for ONGC, and has more transparent earnings. However, the risk to our preference of CNOOC is that oil prices remain sluggish next year or that India boldly transforms its downstream pricing model to something more market driven. Report attached.

**Although tea may come from China it also has grown in Assam since the beginning of time. Known as “cha” in Mandarin and Cantonese, this became “chai” in Russian, Hindi, and even in Swedish and Swahili too. The British East India Company was instrumental in popularizing tea consumption around the world, especially back home in dark, damp England. In 1870, over 90% of tea guzzled in the UK came from China. Worried about this over reliance on one supplier Britain encouraged production in India and in just 30 years, Chinese tea accounted for only 10% of English consumption, with 83% now from India and Ceylon. Might the same thing happen to Chinese factories supplying Wal-Mart?

Average Wal-Mart Mom

Another tea story?

OK. 1985 was when I first travelled around communist China and at that time it really was communist: everyone wore “Mao suits,” the shops were empty and only rich peasants had a bicycle. It was a real learning experience. Also, no one, and I mean no one, had ever seen a real red-haired devil up close before and I was mobbed wherever I went. It was like being Mick Jagger everyday at the nude spa when you don’t want to be. All journeys in China then required long (read: uncomfortable) train trips in which the only thing served was copious amounts of hot water from large metal thermoses.

You had to bring your own cup and usually your own tea leaves. I learned Chinese tea leaves will only sink and make proper tea if you have a lid on your cup of boiling hot water. Tea Cup Factory No. 1 made all the cups. Tea Lid Factory No. 4 sometimes made the lids. You could always buy a cup in a gov’t department store but lids were priceless as I discovered sitting there blithely on my first train trip with my fresh new mug of tea in front of me. The train entered a long tunnel and everything in the car went black. As we came out the other end my mug was still there but the lid was never seen again and I learned even more.

That’s me in the middle


“Everyone talks about the weather but nobody does anything about it.” – Mark Twain

Much like the weather, New Oriental Education’s share price (EDU US, BUY) has been volatile of late. But, internet guru Eric Wen advises you to do something about it – buy it. EDU reported F1Q11 results in line with earlier guidance but also said two positive things: September enrollment was up 27% y-y and they are cutting school expansion from 100 to 70 for FY11 to comply with investor requests.

Earnings this year are depressed as EDU went on the offensive to grab market share and expand before new entrants to the market (Xueersi, Xueda, Global and Ambow) could steal their lunch. We see earnings next fiscal year growing 50% as a result. Averaging this and next fiscal year to approximate calendar year for comparison reasons, EDU is trading on 32X PE with 33% earnings growth – or a PEG of 1, in line with historical averages. Note attached.


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA
Mirae Asset Securities: Risk is to the Upside

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