Tags: Jason Simpkins, Olympics

Beijing's $40 Billion Olympic Investment: How Investors Can Take Home the Gold

By , Money Morning •

By Jason Simpkins
Associate Editor

The 85,000-mile relay that will culminate with the lighting of the Olympic torch got underway March 24. The torch will pass through five continents and 20 countries on its way to the Beijing 2008 Olympic Games. But the flame isn't just leading athletes and spectators to the games, it's also lighting the way to profit.

Beijing is spending at least $40 billion on venues and related infrastructure, all with the goal of featuring a modern country that has grown into a political and economic powerhouse.

In addition to the government's own investment, an estimated 3.5 million visitors will be bringing their wallets to the games. More than 60 sponsors, some of which spent $100 million each just to be associated with the Beijing Olympics, also have opened up their checkbooks.

There's going to be a lot of money flowing through Beijing as consumers, advertisers, and investors alike swarm the city.

Here are a few of the leading candidates to win big come August...

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Overnight Profits

The number of international visitors to China rose 9.6% in 2007, with close to 55 million arrivals, the World Tourism Organization reported. In that same time, Chinese domestic travel skyrocketed with 1.6 billion domestic trips.

Hotel managers in China saw an increase in revenue per available room (revPAR) of 3.2% in 2007, according to HotelBenchmark Survey by Deloitte & Touche LLC.

The Beijing Tourism Authority predicts the city will be flooded with 3.5 million visitors, both domestic and international, during the games. Hotels and houses for rent are going quickly, and insiders say that rental rates during the Olympics will be 10 times the usual amount. Conscious of the investment opportunity, Beijing residents have been grabbing up as much real estate as possible to prepare.

The average cost of a hotel room in Beijing was $127 a night in 2007. The city's occupancy rate was 70.8%. And it's a safe bet that both occupancy, and the cost of accommodations, will be significantly higher in 2008.

A leading economy hotel chain like Home Inns & Hotel Management Inc. (HMIN) stands to reap a tidy profit from the increased traffic that will be pouring through China. Home Inns reported revenue of $135.7 million (989.5 million yuan) last year, an annual increase of 68.1%. The profit margin of the Nasdaq-listed company jumped 43% year over year to $15.2 million (106.7 million yuan) in 2007, its unaudited financial report said.

"While we delivered strong overall financial results for 2007, we did experience increased costs as well as some negative margin pressure during the fourth quarter due to our acquisition of Top Star and our expansion into lower tier cities," Chief Financial Officer May Wu said in the report. "We will continue to make efforts to more effectively manage costs as this effort continues."

The company expects its revenue in the first quarter of 2008 to be in the range of $47 million to $50 million, with full-year revenue growing 70% to 80% over 2007.

The Other Baidu

For 40 years - dating back to 1969, when civilian Internet emerged from a Defense Department project - the United States has had the biggest population of Internet users. But that mantle - like so many others - has been passed along to China.

China has some 225 million Internet users, according to the China Internet Network Information Center. BDA China, a Beijing-based consulting and research firm, thinks that figure is closer to 228 million. Either way, the United States has relinquished its web-surfing crown. And in the next year, another 60 million China consumers are expected to join the online world.

Web portals will be busy as billions of frenzied fans sign on for updates on their favorite events. Baidu.com Inc. (BIDU), China's leading search engine, will do well, no doubt, but Sohu.com Inc. (SOHU) might be a more unconventional play.

Sohu is a popular provider of online entertainment, information and communication. And it's the official Chinese portal for the Beijing Olympic Games. Sohu's fourth-quarter revenue shot up 90% to $65.3 million. Earnings soared 144% to 43 cents a share. Those results easily eclipsed Wall Street's projected results of 39 cents a share on $55.4 million in revenue.

Advertisers will continue to ratchet up their spending as the Games draw nearer, and Sohu expects advertising revenue to soar by 40% in the first quarter of 2008. Analysts also think Sohu is well positioned to build on its momentum in the next year.

In a note to clients, Goldman Sachs Group Inc. (GS) analyst Leah Hao raised her first-quarter game revenue estimate by $4 million, increasing her total revenue estimate for the quarter to $72.8 million from $68.7 million. She also raised her first-quarter earnings estimate to 42 cents per share, from an earlier estimate of 34 cents per share.

The World's Largest Clean-up Effort

In addition to beating out the United States to become the world's biggest Internet user, China has also supplanted the United States as the world's biggest polluter.

Half of China's population - 600 million to 700 million people - drinks water contaminated by human and animal waste. In fact, one billion tons of untreated sewage is dumped into the Yangtze River each year.

Just as alarming, both the World Bank and Chinese Academy on Environmental Planning believe air pollution to be responsible for no less than 411,000 premature deaths a year.

Indeed, China's pollution is so bad that some Olympic athletes will be taking the last possible flights to Beijing to delay breathing in the city's smog for as long as possible. U.S. Olympians will be bringing their own food out of concern for safety.

Most of the air pollution comes from the China's coal-fired power plants, which supply 80% of the nation's energy. The country is home to more than 2,000 coal-fired power plants, and a new one goes into operation every week.

Between 2003 and 2006, worldwide coal consumption increased as much as it did in the 23 years beforehand. China was responsible for 90% of that increase. China used 2.5 billion tons of coal in 2006, more than the next three highest-consuming nations combined.

With its climate-change program, China is working to reduce greenhouse gas emissions by 950 million tons over the next two years. To accomplish that goal, China's going to have to find a new source of power, and so far nuclear energy seems to be Beijing's b est option.

In addition to the 11 nuclear reactors already operating in China, the government is looking to build 30 more nuclear power plants. This is the largest nuclear power initiative ever undertaken, and it's entirely likely that the price tag will exceed $50 billion. For its money, the Republic of China would end up with 11% of the world's nuclear energy capability.

What does this add up to? Possibly a big run-up in the price of uranium. At the end of 2003, when China first announced its plan, uranium was valued at $15.50 a pound. By June 2007, the price had climbed to $133, a 758% increase. The price has retreated from its peak to a current price of $73.00 a pound. But once China's newest power plants come on line, and other emerging markets such as India increase their consumption, the price will likely bounce back.

According to the market's leading journal, The Uranium Market Outlook, the amount of available above-ground uranium is at an all-time low. The journal attributes the sudden dearth to 30 years of underinvestment, increasingly stringent regulations and an overall lack of exploration of uranium deposits. It takes eight years for a mine to be brought up to standards and to start producing uranium of a high-enough grade for use in nuclear reactors.

Cameco Corp. (CCJ) has been called the "Saudi Arabia of Uranium" because it is the world's largest producer, accounting for 20% of global supply. It's also straight downstream from a glut of cash contained in a new energy bill that offers $18.5 billion in loans to cover the construction costs of new nuclear plants.

The stock has been beaten down by uranium's price drop - and a sagging global economy - but was raised to "Buy" from "Neutral" by Merrill Lynch & Co. Inc. (MER) Canada analyst Alka Singh, who wrote in a note that the stock "looks attractive" and may be poised for a rebound. 

News and Related Story Links:

  • Associated Press:
    Sohu Up As Analyst Raises 1Q Estimates
  • TradingMarkets.com:
    Sohu Keeps Focus on Ad, Games, and Search
  • ARS Technica:
     China now #1 in executions, population... and web surfing!