Prudence won out. Last week, we said we were pondering one of two routes for our holding in Jiangsu Expressway (600377): Selling and getting out with a modest profit, or holding on for a bumpy ride, potentially profiting off of one of the Shanghai market's periodic bouts of crazy rumor-fueled speculation.
Looking into the reason for Jiangsu's surprisingly good recent performance, we found it in the form of a certain famous mouse. A report by Orient Securities released early in November highlighted a potential windfall (中) for Jiangsu Expressway from the recently approved Shanghai Disneyland project. Despite the finished theme park – and its toll-road-using visitors – remaining years off, Shanghai investors bought in on the expectation of... well, not really on the expectation of profits, but the hope of the possibility of profits several years from now, assuming the success of the Disney theme park, according to the analysis of one brokerage. At least it's more of a sure bet than the one on Warren Buffett's suits. Or the one on National Day fireworks. Maybe.
So we sold – All 200 shares, at RMB7.28 (US$1.06) per share, netting a comfortable 12.87% return. We got out in the nick of time, too. Soon after selling, domestic markets became spooked by the prospect of tighter capital adequacy ratio requirements for banks. Then came news that Shanghai Disneyland, contrary to all expectations, will in fact be the smallest Disneyland ever. It's hard to see great benefits for a toll-road operator with visitor numbers likely to be at levels that wouldn't strain a poorly maintained donkey track.
While Jiangsu Expressway rallied on Wednesday, it ended the week down, like most of the market, trading at RMB7.06 a share.
The capital adequacy ratio issue has thrown a soggy blanket on investors as we approach the end of November. From flirting with 3,400 points earlier this week, the Shanghai Composite Index (SCI) is back down around 3,000. With all attention on a gradually tightening environment, and on worries about private investment's ability to pick up where stimulus spending left off, we doubt we'll see much of a sustained move higher this year.
That doesn't bode well for our other holdings. Both China Vanke (000002) and China COSCO Holdings (601919) are back in negative territory. The outlook for both remains basically positive, but it's hard not to wonder if we should have taken our prudence a little bit further.
The Capitalist Roader Fund is down 26.69% from June 3, 2008. The SCI is down 9.8%.