A flurry of Chinese companies have chosen London over Shanghai and Hong Kong for a stock market listing over the past few years. Clearly, one has to wonder why so many businesses need to come to London to seek investors when the ongoing growth in the Chinese economy means that it is awash with cash. However, a few London-quoted Chinese businesses appear to offer value for investors who buy in at the right time, and we believe one of these is Prosperity Mineral Holdings.

Macau-based Prosperity is focused on two main activities: the manufacture and sale of cement, and the trading of iron ore. China is the world’s largest consumer of these two materials. In the company’s last reported quarter, iron ore trading accounted for approximately 69 per cent of turnover.

Prosperity has supplied iron ore to customers in the People’s Republic for more than 15 years, which has allowed its management team to develop strong relationships with steel manufacturers in China. The company sources its iron ore principally from Australia, Brazil and South Africa. But in December, it reported that a more diversified iron ore supply in South East Asian locations closer to China was proving beneficial. Indeed, the gross margin from the iron ore trading operation in the second quarter of the current year had increased to 10.8 per cent, compared with just 4.3 per cent in quarter two of 2007.

Meanwhile, the company’s cement manufacturing business is continuing to hold up well, with gross profits for quarter two of 2008 up 3.3 per cent over the same period in 2007. The cement business could end up delivering more of the company’s growth in the long term thanks to the strong demand for cement in China that has been forecast for the next few years.

Cement manufacturing is a good business to be in if, like Prosperity, you have access to a large limestone reserve and are close to your target market. In Prosperity’s case, it is located in Guangdong, a prosperous region in which demand for cement is growing much faster than in the rest of China. The threat from rival cement manufacturers outside Guangdong is limited by a key barrier to entry: cement is a low-cost material that is expensive to move around.

Overall, Prosperity delivered a very strong first half, with total revenues increasing by 26.5 per cent on the second half of 2007 to £106.5 million. Pre-tax profits came in 14.6 per cent higher at £12 million. Prosperity is forecast to grow its earnings at only five per cent this year and next, which, given the strength of the interim results, seems to suggest that house broker Evolution is a little overcautious.

Even if the results for the full year do turn out to deliver only modest earnings growth, we think Prosperity is worth buying and holding because of its healthy annual dividend payment of 9.2p (at current exchange rates), which works out at roughly 6.2 per cent in dividend yield terms. In the longer term, Prosperity is in a good position to deliver significant profitable growth as China continues to invest in its infrastructure.

Prosperity Minerals Holdings	AIM	£17.89m	13.50p	0.00p
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Other company articles:
Chinese cement play’s prosperous outlook			08/02/2008
Newcomer - Prosperity Minerals			24/05/2006