Score Massive Profits From the Russia-China Energy Deal

1 | By Michael A. Robinson

You’ve probably already heard about the new natural gas pact between Russia and China. In the deal, China promises to buy Russian natural gas worth roughly $400 billion over the next 30 years.

Most investment analysts are busy pointing out the obvious – that this is good for Russia’s energy sector. And maybe some of you are fuming about what this might mean for the U.S. economy and its natural gas segment.

But what Wall Street and most other investment analysts are missing is that this is really a technology story. Indeed, I believe that Russia’s strong desire to stimulate its growing tech sector was a key motivating factor behind the new accord with China.

This deal will have a profound effect on Russia’s emerging high-tech industry.

Because I’ve recommended a number of Russian tech stocks in the past, the deal could have an equally profound effect on your portfolio. Today, I want to touch base with you regarding those two Russian high-tech firms that stand to grab windfall gains from this historic arrangement.

When I say this deal is “historic,” I’m not just talking about the massive amounts of money at stake here.

The deal is also the high-water mark in a “secret history” of improving relations between two countries that were once at each other’s throats.

It all began with a 1969 border clash that left dozens of troops on both sides dead. This Sino-Soviet border conflict is often referred to as the Zhenbao Island incident

Coming Out of the Deep Freeze

Both sides eventually backed off and avoided all-out war. But Sino-Soviet relations remained in a deep freeze until the fall of the former Soviet Union in 1991.

That signature event paved the way for the new Russia to open a productive dialogue with its old enemy. In 2001, the two sides signed a “friendship agreement, under which they would collaborate as a means to check the United States‘ status as the world’s sole remaining superpower.

The two sides agreed not just to engage in arms sales but also to transfer a wide range of military and civilian technology. The agreement covered everything from missile defense and sophisticated radar to aircraft engineering and advanced materials.

Five years later, they built on that with another major tech arrangement. This time, Russia agreed to help China’s budding space program with key technology transfers. By late 2011, China was docking vehicles in outer space, and the world’s most populous nation plans to place in orbit a permanent space station by the end of 2020.

So, as technology investors, we should be looking at this natural gas deal in this tech context. For two decades, China and Russia have been using trade agreements to fortify – and build – their tech infrastructures.

And this gives us a chance to brace our portfolio’s tech infrastructure as well.

Rocket Fuel for the Tech Sector

Thanks to the billions in gas money coming in, Russia will have the money to pay for a long list of technology that will help not only its powerful energy industry but also its entire economy.

This covers everything from high-performance computers that can crunch through mountains of exploration data to wireless systems in remote outposts to seismic mapping software and analysis. Russia also could greatly reduce its energy exploration and recovery costs through the use of sophisticated sensors known as microelectromechanical systems (better known as MEMS). These miniature devices excel at detecting any signs of hidden gas or oil.

The global MEMS industry is worth an estimated $13 billion. Forecasters Yole and iSupply say energy exploration will help the MEMS sector grow some 54% to $20 billion by 2016.

China, of course, is seeking to get some of that money it’s sending to Russia back. To do so, China plans to sell lots of its technology to Russia as the Bear seeks to to boost its own tech economy.

For instance, Russia is spending at least $5.4 billion on its Skolkovo “innovation city” under construction on the edge of Moscow. Designed with Silicon Valley in mind, Skolkovo will be focused on several key strategic tech sectors, including information technology, biomedical, nuclear, space, telecommunications, and, of course, energy.

And let’s not forget that Russia is facing a high-tech infrastructure deadline. The country will host the 2018 FIFA World Cup. Russia has completed construction of two stadiums but still needs to build an additional eight arenas.

With the entire soccer world watching, Russia must ensure that it has the state of the art in such technology as advanced wireless systems, Wi-Fi and other broadband platforms, surveillance, mobile payments, near-field communications, and cybersecurity.

Moreover, the combination of a stronger economy and the influx of tourists is good news for Russia’s burgeoning e-commerce sector, as millions search for information, book hotels, and make restaurant and plane reservations through their smartphones.

In other words, Russia is looking more and more like a tech titan – and that will only increase once China’s billions start rolling in.

That’s why I think you should now take another look at two Russian tech firms. I first told you about these companies back on March 21. If you listened then and picked these stocks up, you should be smiling now.

Here’s why …

Yandex It

At the time, I said Russian stocks in general were oversold. I noted that investors were overreacting to news of international sanctions placed on Russia after President Vladimir Putin decided to annex Crimea earlier that month.

I went on to suggest that it was a great time to pick up Russian winners at a discount. Russian stocks headed down for a bit after my column appeared but have since hit bottom and rallied with excellent gains.

Let’s start with the main stock I discussed with you, Yandex NV (NasdaqGS: YNDX). Known as the “Google of Russia,” Yandex operates the world’s fourth-ranked search engine.

Yandex enjoys a 60% market share in its home country. Though Google (Nasdaq: GOOG) dominates the world stage, it is a very distant second in Russia, where it commands just a quarter of the market.

Web-savvy Russians – and there more of them every day – say they are going to “Yandex,” not “Google,” when they search for information. Roughly half of Russia’s 140 million citizens are now online, one of the highest percentages in Europe.

But Yandex is more than just a straight-up play on search. The company boasts a news site, e-mail and related tools, an e-commerce portal, auction-based advertising sites, and maps and location-based services for mobile devices.

In this year’s first quarter, sales rose 36% from the year-ago period to $305.0 million. Net income for the period rose 19% to $75.1 million. Trading at roughly $33 a share, Yandex has a $10 billion market cap, operating margins of 31%, and a return on equity of 32%.

After my March 21 column, YNDX continued down, losing roughly 20% of its value in roughly five weeks.

But since hitting a recent low of $24 on April 25, the stock has gained 38%. If you acted when we first discussed Yandex, that rally left with you gains of more than 10%.

Shares of the other Russian company I discussed, Qiwi PLC (NasdaqGS: QIWI), have done even better. Qiwi, a leader in electronic payments with 168,000 kiosks and terminals plus Web and mobile platforms, is the Russian PayPal.

This is a very successful company that has a recent history of beating earnings, doing so in each of the five quarters since going public last year.

In this year’s first quarter, Qiwi’s earnings were 40% higher than projected. It had profits per share of 41 cents on a 27% sales increase to $52.6 million.

Trading at roughly $43.90 a share, Qiwi has a $2.3 billion market cap. It has operating margins of nearly 25%, has a stunning 71% return on equity, and pays a 2.7% dividend.

After our March 21 talk, Qiwi also headed down on fears of a Russian slowdown. From that day till its recent low, Qiwi lost about 20% of its value.

However, the stock has rallied for gains of 63% since hitting bottom on April 28. Had you acted after our initial talk about Russia, you would now be sitting on gains of 29%. That’s more than seven times the 4% gains of the Standard & Poor’s 500 over the same period.

YNDX and QIWI are the kind of fast-moving stocks that can have a major impact on your net worth.

Of course, to take advantage, you have to look at sectors that are temporarily out of favor.

And if you are gutsy enough to do that, you greatly increase your chances of scoring exceptional returns.

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