Goldman's Chinese Relations (GS)

Investors may be wondering if Goldman Sachs (GS), the illustrious Wall Street investment bank, can still benefit their portfolio as it approaches $200 per share. While I'm normally against investing in companies with relatively high stock prices, Goldman's fundamentals, political clout and its ability to break through the steel curtain surrounding the super-sized market of China all make it worthy of value investors' attention.

Goldman Sachs reported net revenues of $7.5 billion for its most recent 3rd quarter ending in August, up a modest 2.4% from the same period a year ago. What's really impressive here is that Goldman's net revenues for the 1st 9 months of the year were up 50% over the previous year. Goldman has actually been generating most of its revenues from its trading and principal operations, which encompasses its private equity investments.


Private Equity Investments
Goldman's $2.5 billion investment in the initial public offering of China's largest bank, the Industrial & Commercial Bank of China, through a private equity fund, has the potential to be one of its most profitable trades ever recorded. Goldman is also investing in the growth of China by purchasing companies that are likely to benefit from its increased proliferation of automobiles and its rising levels of meat consumption. In August, Goldman led a consortium of investors in the purchase of China's biggest meat-processing plant.

Individually, Goldman is currently in the process of acquiring a 10% stake in a leading Chinese auto glass manufacturer. Former Goldman CEO Hank Paulson's diligent efforts to forge relationships with Chinese government officials and company executives laid the seed that allowed the investment bank access to China's financial markets. Paulson, who was appointed as the U.S. Treasury Secretary this past April, will be taking another trip overseas before the end of the year to discuss trade and currency exchange issues.

Barriers To Entry
China is very protective of its markets, making the process of attaining licenses to do business within its borders a daunting task. Goldman had to attain a license to underwrite stock and conduct bond sales and a separate brokerage license to trade securities in order to get a foothold in China's brokerage and investment banking markets. Goldman, Morgan Stanley (MS) and Switzerland-based UBS AG (UBS) all have ownership stakes in Chinese brokerages and hope to benefit from China's brokerage business potential.

Competitive Analysis
Goldman has attractive valuation ratios, despite its relatively high stock price. Goldman shares closed at $197.45 on Monday, November 20 and open on November 21 at $199. However, with an extremely low price to earnings to growth (PEG) ratio of 0.74 and a low forward price to earnings ratio of 10.7, the growth prospects for the firm appear to be well intact.

Value investors seek out companies with low price to earnings to growth ratios close to or below "1", since it is a sign of strong future earnings growth. Other non-bank investment banks with impressive price to earnings to growth ratios below "1" include Lehman Brothers (LEH) and Goldman's nemesis Morgan Stanley.

Stock Buy Backs
Another factor contributing to my favorable outlook for Goldman is the amount of stock it repurchased this year. During the first nine months of the year, Goldman repurchased a total of 29.5 million shares of its common stock at a cost of $4.17 billion. With fewer shares available in the market place, share buybacks benefit investors since the remaining outstanding shares become more valuable. In mid-September, Goldman's board approved the repurchase of an additional 60 million shares.


Goldman does not have the size of larger all-in-one banks like Bank of America (BAC) or Citigroup (C), but it does have the ability to build relationships, which an extremely valuable asset for a company of its type. Goldman's brand and ability to cultivate relationships are intangibles that will continue to win over the officials and executives in emerging markets. And it is in these emerging markets that Goldman is expecting serious growth, particularly in Brazil, Russia, India and everyone's favorite, China.

While Goldman's stock is up 52% since the beginning of the year, the stock could have more room to go if Goldman can keep building on its Chinese and other emerging markets relations.