How to Profit From "La Nouvelle Alliance" - France and China

By Martin Hutchinson
Contributing Editor

My Money Morning colleague, Keith Fitzgerald, is a great believer that the best way to play China's explosive growth is to invest in companies that are making money FROM China. Well guess what - not all of those companies are American. French President Nicolas Sarkozy was in Beijing this week, and signed $30 billion worth of contracts for French companies.

What he probably didn't realize was that he was also creating some very interesting investment opportunities.

France and China are - let's face it - natural buddies. France has always traditionally looked to a political counterweight to the United States, and China is beginning to provide one. China wants to keep the European Union from aligning against it in the United Nations and elsewhere, and from imposing anti-dumping duties on its goods, and France is the EU's guiding spirit - even if it's no longer its largest economy.

France has strengths in some high-tech, heavy industry sectors that China needs. And it also boasts the world's most-sophisticated array of luxury goods - haute couture and haute cuisine - that newly wealthy China consumers now crave.

China, on the other hand, has cheap consumer goods that don't compete directly with French-made products, which means France can allow China to sell  them in the European market with no fear of lost market share. Indeed, France will even promote the benefits of trade to EU consumers, so long as it sees a good amount of trade going back the other way.

Clearly, the two companies compete very little, meaning they have many avenues for cooperation.  Still, while Chinese products represent 5.8% of French imports, China could buy more from France, which represents only 1.4% of Chinese imports.

The $30 billion worth of deals Sarkozy helped negotiate with China may help shift that balance somewhat back in France's favor. It basically consists of three major French contracts:

  • First, Areva, the world's largest builder of nuclear power plant reactors, is to build two new reactors in conjunction with China Guangdong Nuclear Power Group. The sale, which totals $12 billion, also includes a 10-year agreement to buy uranium from UraMin Inc., a uranium producer owned by Areva. Regrettably, you can't buy Areva directly; it's owned entirely by the French government. A planned privatization in 2005 was called off, but it's thought the deal may return next year. However, don't despair: In a typical French compromise, the company has issued investment certificates, which have all the rights of ordinary shares except the right to vote - listed on Euronext and - through the Pink Sheets - on the U.S. over-the-counter market (ARVCF.PK). As a U.S. retail investor, you probably don't want to vote in a French company election anyway, but the company is pretty expensive at about 42 times trailing earnings.
  • The second big French deal that Sarkozy closed [listen, you really can't beat a French salesman when he's on song, and plying the client with really first class champagne!], is a sale of 160 commercial passenger jets (110 A320s and 50 A330s) by chief Boeing Co. (BA) nemesis Airbus Industrie SAS, in a deal totaling $15 billion. When French charm and natural geopolitical alliance come together, it doesn't matter that the euro is hugely overvalued against the dollar at $1.50. Airbus is a unit of the Franco-German defense-aerospace giant EADS NV (again, listed on Pink Sheets (EADSF.PK)). Unfortunately EADS' Price/Earnings ratio is infinite, as the company is currently operating at a loss. Maybe that one's not such a hot investment opportunity.
  • The third big deal Sarkozy closed [busy day!] was for the telecom giant Alcatel-Lucent (ALU), which signed $1.1 billion of contracts to expand the mobile networks of China Mobile Ltd. (CHL) and China Unicom Ltd. (CHU). The Alcatel shares are rather more worth buying at only 12 times prospective earnings; Alcatel-Lucent is pretty much a blue chip and its China deals, while smaller than those of Areva and Airbus, give every sign of being solidly profitable.

Alternatively, rather than investing in the successes of Nicolas Sarkozy, master salesman, you may just want to invest in some of his principal sales tools through LVMH Moet Hennessy Louis Vuitton SA (pink sheets (LVMHF.PK)). Maybe a little pricey at 20 times earnings, but this is French quality, after all, not domestic rubbish - and you get Sarkozy's champagne (Moet-Chandon, sans doute), his brandy (Hennessy cognac), and very likely also his Louis Vuitton briefcase!

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