RusHydro: Consolidating assets

RusHydro is rolling up power generating assets in Russia. It issued shares at one ruble to RAO ES of East Group for company shares worth 1.65 Rubles.

"On June 30, 2011, the AGM of RusHydro passed a resolution to increase RusHydro's authorized capital by issuing 89,000,000,000 additional ordinary shares with a par value of RUR 1 each. Monetary value of the property transferred to pay for additional shares of RusHydro was determined by an independent appraiser- LLC Institute for Enterprise Issues (the City of Saint Petersburg). In addition, JPMorgan and Morgan Stanley presented their fairness opinions to the Board. The valuations as well as the offering price of shares of in the amount of RUR 1.65 per share were approved by the Board of Directors of RusHydro."

Consolidation provides lots of opportunity for economies of scale for these power generation assets.

"Thus, the first stage of the placement is now complete. As a result, RusHydro consolidated a number of energy assets and became the controlling shareholder of the RAO ES of the East Group and the dominant player in the power sector of the Far East of Russia. This acquisition is fully inline with the development strategy of RusHydro to consolidate undervalued generating assets in Russia to create additional shareholder value through realization of synergies with existing generating, retail, engineering and R&D assets of RusHydro Group.

RusHydro is developing into the preeminent power generation company of Russia with the consolidation of the Far East assets.

"The strategy of RusHydro on development of the Far Eastern power sector shall include substitution of economically inefficient thermal plants with efficient low-cost generation, conclusion of bilateral power-purchasing agreements with consumers both for existing capacities and generation assets under construction, realization of opportunities of electricity export to neighboring countries and carrying out of investment projects using instruments of private-public partnerships and project financing."

Russia Long: Stability obscured by political troubles

Russia is doing well while Europe suffers. Unemployment has dropped to 6.3% from horrible levels in the previous decade. Inflation is moderating. As long as the oil and gas prices hold up, Russia will continue to maintain a positive current account. Emerging Market Musing notes that Russia foreign currency denominated debt is highly manageable. Fiscal debt is less than 20% of GDP. Russia is currently growing faster than Brazil.

Finally all emerging market investments must be tempered by possible currency gyrations. The ruble is currently at a two year high.

Currently markets are jittery because of recent protests of Putin. But with economic growth at 5% annual rate, I doubt too many waves will be made.

As mentioned before, the authors favorite Russian stock is RusHydro (RSHYY.PK), already owned by the author.

The author has already purchased RSX at $26.87.

Buy Indonesia: Lots of momentum

Indonesia has tons of demographic momentum and development in progress. As Emerging Market Musing notes, Indonesia is no ugly duckling and holds lots of positive indicators for sustained growth.

This blog is long Indonesia by buying IDX at $27.2.

Following Buffett: BAC preferred shares

Bank of America is currently facing serious regulatory scrutiny, and therefore the company is selling assets to prove it can make capital ratios under Basel 3 standards.

But the overall solvency of the bank looks intact. Warren Buffett recently purchased cumulative preferred shares of BAC at 6%. While such seniority is not available to the author, this newsletter will purchase BAC H series preferred shares at $22.63 (par $25 / current yield 8.8%).

RusHydro : Tapping Russia's growth

When looking for an emerging markets stock, utilities reflect the economic health of the country with less volatility than media, tech, commodities, or financials. The Russian index is dominated currently by mining or metals companies. In order to support both industries, the power infrastructure must be developed. This is what led the author to RusHydro.

RusHydro is the worlds second largest hydropower generator, and the largest successor of the former Russian monopoly broken up in 1993. The company was recently privatized by the Russian government (which still owns over 50% of the company) and will complete the privatization of all entities over the next few years.

The company is currently enjoying high paced growth of revenues and earnings. RusHydro has plants all over Russia, and supports many of the fast growing mining interests power needs. But in the future RusHydro also has potential to export it's energy product to China via it's Siberian interests.

"Sayano-Shushenskaya is the fourth-largest hydropower plant in the world by average power generation, with an effective capacity of 3.5 gigawatts and installed capacity of about 6.7 gigawatts. It accounts for roughly a quarter of RusHydro's total capacity, and damages could cost the company about $350 million, analysts estimate."

As recently as 2009 RusHydro faced a devestating setback when the Sayano-Shushenskaya hydroplant blew up and destroyed 9 of the 10 turbines of the facility.

"OAO Power Machines, which made Sayano-Shushenakaya’s turbines, said it’s ready to make at least six units for the station in 2011. It wasn’t asked to service the turbines since 1993 after installing the first and second units in 1978 and 1979, the Moscow-based company said in an e-mailed statement. "

Overall there is tremendous long term upside to RusHydro and major investment banks are taking notice.

"ADRs of OAO RusHydro, Russia’s largest renewable energy producer, jumped 3.4 percent to $3.97, a three-week high, after JPMorgan Chase & Co. reiterated its “overweight” recommendation on the stock while cutting the price target on its Moscow-traded shares by 30 percent to 1.54 rubles. RusHydro’s Micex shares gained 2 percent to 1.22 rubles, or 4 cents. One ADR equals 100 ordinary shares."

The author purchased RSHYY.PK ADRs at $3.42

Bancolombia is a proxy for growth in Colombia

The demographics, geopolitical, and internal political trends of Colombia are very favorable. Thus I am looking to invest in Bancolombia as a proxy for capturing growth in that country. That said, there is a stock market crisis on the horizon and I believe everything will be on sale when the market panics.

The author is entering an order to buy Bancolombia at $43/share.

The following article quote sums up the opportunity.

Bancolombia gets a lot of Kuczma's attention. The 945-branch, $42 billion-in-assets bank has a leading 21% share of Colombia's loan market, and its stock, at 65, is up nearly 5% so far this year. It also sports a 2.2% dividend yield.

The shares have benefited from improving investor attitudes toward Colombia. In March, Standard & Poor's restored the investment-grade rating of Colombia's sovereign debt, removed in 1999 as the country descended into chaos caused by leftist guerrillas. A decade and $7 billion later—mostly in military aid from the U.S.—the government's stronger hand and the global commodities boom have given the economy new life. Bancolombia's Medellin home might still conjure images of drug-dealing mayhem stirred by the notorious Pablo Escobar, but he died 18 years ago. Although violence hasn't disappeared, murders and kidnappings are down 90% from their peak a decade ago.

For years a pariah, Colombia now attracts a flood of international tourists and foreign direct investment, which at $7 billion through June, was up almost 80% on the year. Oil production is expected to reach one million barrels per day by year end, putting Colombia in the major leagues of global crude producers. The country is also enjoying a windfall from record coffee prices. Less known is that Colombia has become the world's fourth-largest coal exporter.

BRFS: Merger approved - Full steam ahead

The BRFS merger was approved with concessions.

Overall, only 13% of the merged company will be impacted by the concessions.

Full steam ahead.

"BRASILIA, July 13 (Reuters) - Brazilian antitrust regulators gave their support on Wednesday to a deal that saves the merger that created processed foods company Brasil Foods.

Antitrust watchdog Cade endorsed a plan by which Brasil Foods SA (BRFS3.SA)(BRFS.N) will sell 80 percent of flagship brand Perdigao's production capacity and halts the sale of some of its products for between three and five years.

The agreement averts a forced breakup of Brasil Foods, the Sao Paulo-based processed foods giant spawned from the 2009 takeover of debt-ridden Sadia by smaller rival Perdigao. Cade had threatened to derail the merger, citing Brasil Foods' dominance in several markets."

Brasil Foods : Suffering from turbulence

Brasil Foods is currently facing two major issues. The first is a rejection of the merger creating the company. The second is the ban of importing of Brazilian chicken into Russia. BRFS currently provids 40% of the chicken imported into Russia, and has a large presence in 40 other markets across the world.

Brasil Foods is currently facing regulator objection to the merger to create the larger company from the combination of Perdigao SA and Sadia SA. Apparently the Brazilian anti-trust regulator has rejected the merger for fear of price fixing in the domestic market do the potential dominance of the new firm on the basis of market share.

But the merger, arranged when Sadia had huge currency derivative contracts blow up on them for a $1B loss, was financed by the Brazilian government. So the same government that put up the money for the merger is now rejecting the combination. There are lots of variables on the motivation of the government, but what is obvious is that this merger is in line with the directive of the Brazilian government to create "national champions".

The regulatory finding is ... a rebuke to Brazil's strategy of using tax-payer money to form "national champion companies" that it hopes will project the country's rising economic power around the globe. Under an explicit strategy to bulk up Brazilian companies for global competition, Brazil's state development bank, BNDES, provided major financing to back the merger.

In fact, JBS, BRFS' main competitor, completed a similar deal last year between JBS SA and Bertin SA to create the world's biggest exporter of beef. The horse has left the barn, why try to close the gate now?

The author believes some compromise will be reached and the merger will go through with various concessions. It would be too painful to keep these companies after so much has been invested.

Regarding the Russian ban, a temporary affair. Russia has, without warning, banned Brazilian meat exports for periods of time on four different occasions in the last ten years. Each time, it has been proven that the "justification" for the ban was without merit. The author feels this will also be the case on this occasion.

The author still long BRFS.

Botox Refresh

Every time I see a "Real Housewives" episode, I see the future of beauty care and it starts with Botox. I will underscore the attractiveness of Allergan based on the following review.

First of all, Allergan will be able to avoid the dreaded patent cliff for Pharma companies because of the many different indications found for Botox.

"A huge part of Allergan's patent-cliff immunity is its blockbuster Botox, which has helped the company evade the patent problems facing others in the industry in two ways: First, Allergan has continued to discover new applications for it. "Really, Botox is a Russian doll," says Allergan CEO David Pyott, because Allergan keeps discovering new uses stacked inside the original treatment."

Second, Botox is a biologic, rather than small molecule therapy, and thus it is very hard for competitors to replicate without violating their patent defenses.

Third, the newest indication for Botox, prevention of chronic migranes, is the first therapy for prevention of the condition. This is a huge potential market that could lead to an additional $500m in sales for the product. Allergan also makes Latisse, an eyelash extending drug estimated to reach $500m in sales.

Essentially what distingishes Allergan is their innovation in biotech for cosmetic enhancement with mild medical applications. Allergan also has opthamology products and obesity products like the Lap Band. But those areas have not proved as profitable as the biotech area.

Overall, there is tremendous upside to Allergan. As a friend of mine Shawn said tongue in cheek, "It is the Intel of the 21st century". I am sure the "Real Housewives" would agree.

The author changed his previous order and bought AGN at $80.46.

Naspers: The Top Emerging Markets Internet Play

Naspers originally was South African publishing company and still owns a large portion of the print media market in that country. But since diversifying into internet and media startups, Naspers has become a major force in emerging markets internet growth.

Naspers owns 33% of the most profitable internet company in Russia, Mail.RU. Through this investment, Naspers indirectly owns a small portion of Facebook and also Zynga. Naspers also owns 30% of the most profitable Chinese internet company, TenCent. Naspers owns 30% of the print media leader of Brazil and has been supporting social media start ups to rival Facebook in Latin America.

Overall, if it Naspers continues to cultivate it's niche, it could become a worldwide congolmerate of internet media companies. So far, management has shown great foresight and prudence. I am buying Naspers outright and we will see what the future brings.

Long Naspers at $59/share.

Real Housewives use botox

As the Real Housewives series has highlighted, beauty enhancing treatments are a "must have" for affluent, attention seeking females (and maybe even a few affluent, attention seeking men too). Allegran holds for the "beauty in a box" Botox treatment worldwide for cosmetic and medical uses. Treatments such as these are an undeniable trend and to own a piece is a must.

Thus the author is going long Allegran (AGN) at $78/share.

Earthquake, Nuclear Crisis, and a perfect buying opportunity

There is no way to predict an earthquake. It is known that the "Ring of Fire" seismology puts Japan in one of highest risk places in the world for earthquakes. But no one can foresee a 9.0 earthquake or really prepare for all the outcomes. Yet TEPCO, the operator of the nuclear reactors, is currently facing the aftermath of that scenario. The company that provides 35% of the electricity sales in Japan has seen it's stock price fall over 85% from pre-crisis levels due to compensation claims related to the event. In fact, TEPCO is now at risk of bankruptcy due to massive claims and the unwillingness of banks to lend to TEPCO without government guarantees.

WSJ, May 20, 2011

"TOKYO—Tokyo Electric Power Co. said Friday it logged a net loss of ¥1.247 trillion ($15.28 billion) for the fiscal year ended in March—the biggest annual loss in Japanese corporate history outside the financial sector—as it was hammered by massive costs in battling the Fukushima Daiichi nuclear accident.

With compensation liabilities expected to run into trillions of yen (tens of billions of dollars), Tepco also warned that the "significant deterioration" in its financial position "raises substantial doubt about its ability to continue as a going concern."

Given the situation are two alternative paths for Japan to take toward TEPCO...

The negative alternative....

If TEPCO pushed into bankrupt, equityholders of this previously considered "orphans and widows" stock will be wiped out. Insurance companies, stock indexes, pension funds, and other conservative investors will be impacted at a time when Japan's financial system is precarious.

"Ms. Matsumoto is just one of the more than 741,000 individual shareholders
the embattled utility had at the end of March, many of whom had purchased the
stock in hopes of stable and high dividends. While equities are still not the
most popular investment tool in Japan, Tepco was perceived by many Japanese
families as one of the few safe investments to be handed over from one
generation to the next."

Yet these same groups will be responsible for recapitalizing whatever company takes the place of TEPCO, with no certainty of a better outcome for their new investment.

Bloomberg, "Japan to Help Tepco Pay Nuclear Claims; Banks May Have to Write Off Debt" May 13, 2011

“The government should make it clear that consumers will have to shoulder the burden,” said Kazutaka Kirishima, economics professor at Josai University near Tokyo. “Whether through increased electricity rates, tax hikes or government bond issues, the public will eventually have to pay.”

The positive alternative...

On the other hand, if the Japan government provides a financial backstop to TEPCO and returns it to stability, the "orphans and widows" and asset managers will recover and the government will be forgiven for whatever pain was incurred. The breadth of the electric company, TEPCO, that provides electricity to 25% of the nation, cannot be understated. The US nor the UK was willing to force BP into bankruptcy, and it is less likely that a public utility will also suffer such a fate. This is a national champion. As seen by the US financial crisis and how the Fed supported the whole commercial paper market, major industrial countries are top priority for support in financial distress.

In fact, the Japanese government has already established that it is stepping in to support TEPCO, spoken or unspoken.

Bloomberg, "Japan to Help Tepco Pay Nuclear Claims; Banks May Have to Write Off Debt" May 13, 2011

"Japan will create a body to handle claims against Tepco, as the company is called, and will issue bonds to fund them, according to a statement yesterday. As part of the aid, which may include taxpayers’ funds and purchase of shares in Tepco, Chief Cabinet Secretary Yukio Edano said lenders may be required to write off loans to the company."

The writing is on the wall. Japan will stand behind TEPCO and as an investor it is a viable investment opportunity.

Thus this blogger is going long TEPCO (TKECY.PK) at $4.9/share.

Yet to protect the downside, this will be hedged with the Japan index. If there is a nuclear blow up, it should happen sooner rather than later and take the whole Japanese stock market down with it.

Thus this long TEPCO position will be hedged by buying EWJ Dec 2011 $8 Put for .18.

Japan Nuclear Risk Overdone

After performing extensive research of Japan quake, I read that the risk of any significant lasting impact beyond the local area is very low. The Japanese nuclear crisis is described in the worst case as a Level 6 disaster, but the Level 7 Chernobyl disaster led to the loss of only 31 lives (horrible, but manageable) and increased long term cancer rates.

The Japanese industrial complex is significantly undervalued right now. The nuclear risk is acknowledged, but the stimulative effective of rebuilding will bring about growth over next 6 - 18 months once the rebuilding starts.

The author is long EWJ at $10.30.

Catch the agricultural runup : Long Mosaic

Roubini has noted that stimulus investment has led to increased commodity prices. That coupled with a poor harvest of corn, wheat, soybeans, cotton, and a few others is leading to higher prices for the core agricultural products. There is a macrotrend that is pointing to significant increases in commodity related assets.

Thus there is basis for the report by the executives of Mosaic when they tell us operating earnings have tripled YOY in Q2 2011, production capacity of potash is running near 100%, the company retired a $455m bond three years early, demand has increased across all markets, demand is set to break record levels, set in 2007, in all market segments.

The author sold Mar 11 $85 puts at $8.50 and Mar 11 $80 puts at $5.50.
The author also initiated a long position in MOS at $79.82.