Investing in China has not been for the faint of heart. Shares
of major companies have surged and fallen in repeating cycles
during the past few years. But take a step back and note that
China's economic growth has only been going one way -- up. China
has had a remarkable run and years of robust economic growth have
enabled it to move into the top tier of global economies in terms
Thanks to the laws of bigness, China's future economic growth is
unlikely to be as impressive. But thanks to very heavy investments
in infrastructure, China is now well-equipped to handle a sustained
period of solid economic growth -- perhaps in the +4% to +5% range.
That's a rate that we here in the United States can only envy.
The key then is to not simply focus on Chinese stocks that are
doing great right now, but instead look for Chinese companies that
stand to do well over time -- that means companies focused on
China's emerging middle class. As the ranks of the Chinese middle
class swell, look for growing spending on health care, retail goods
and tourism, along with sustained advances in agricultural yields
and energy efficiency.
Ctrip.com (Nasdaq: CTRP)
With rising disposable income comes the urge to travel, and Chinese
citizens are increasingly venturing out, either elsewhere in China
or throughout Asia. And they're increasingly using the Internet to
research and book flights and hotels. But this is not yet a mature
business. Less than 30% of the Chinese population is currently
online, compared to more than 70% in countries such as Korea, Japan
and Singapore, according to global communications firm
How large is the potential travel market? During the late
September/early October holidays, roughly 200 million Chinese are
expected to hit the road (mostly to go back to their home region).
That's nearly the entire population of the United States. And
according to analysts at Brean Murray, 10% of Chinese travelers now
use the Internet to arrange travel plans -- roughly 20 million
people. That figure is expected to rise to 60 million in 10 years.
Ctrip.com is seen as the best pure play in the online booking space
(along the lines of
Expedia (Nasdaq: EXPE)
), and has considerable brand recognition in this fast-growing
area. Web portal Taobao.com has vowed to overtake Ctrip.com
eventually, but there's ample room for both of these firms to
As for major hotel chains,
Home Inns & Hotels (Nasdaq: HMIN)
has established a national network of lodgings, along the lines of
Holiday Inn or Best Western.
China Lodging (Nasdaq: HTHT)
has similarly built an impressive national footprint. However, both
of these stocks are awfully expensive based on trailing and current
. This is a case where it may be wise to wait for a pullback, so
you may want to put these names on your watch list.
The ad market builds
Chinese consumers are bombarded with advertising pitches at every
turn. But companies are realizing that the scatter-shot approach
isn't helping to truly establish brands in consumers' minds, so
they are turning to specialized agencies that have more targeted ad
campaigns tied in across several types of media.
Sina.com (Nasdaq: SINA)
has emerged as a leader in the space. The company's range of tools,
both offline and offline, are considered to be very innovative,
which has enabled Sina.com to quickly build a large base of Chinese
and foreign clients that are looking to get a foothold in China.
The market for Sina.com's services slowed earlier this year, and
sales growth is expected to cool to about +10% in 2010. But recent
results have been much more encouraging, leading analysts to expect
a +20% rebound in sales next year. Over the long haul, investors
should expect solid +10% top-line growth and more impressive
Deer Consumer Products (Nasdaq: DEER)
I've written about this company several times before, noting that
it is morphing from a supplier of global kitchen appliance firms
into a solid brand in its own right in China. Growth has ranged
from steady to spectacular: sales are likely to double this year
and grow another +25% in 2011. Longer-term, sales growth is likely
to moderate in step with China's decelerating GDP growth.
Shares of Deer hit almost $18 last fall and can now be had for less
than $10, even as
earnings per share (
estimates have steadily risen during that time frame. The company's
is helping to support shares, as management has recently announced
a series of stock buybacks. This is a solid, unsexy play on the
Cars, cars and more cars
Chinese consumers have quickly grown to love their cars. And the
nascent Chinese auto industry aims to capitalize on that demand and
also eventually export to other markets -- if quality standards can
be boosted. It's hard to find U.S.-traded shares of any Chinese
auto makers, but
Wonder Auto Group (Nasdaq: WATG)
is a backdoor play, providing a wide range of auto parts to the big
auto makers. The company makes everything from alternators to seat
belts to airbags. And as is the case with Deer Consumer Products,
exports are also part of the picture, which explains why the auto
parts sector has been growing even faster than the auto sector
China's water woes have been widely chronicled. The country's
pro-industrial policies led to epidemic levels of pollutants being
dumped into the country's major waterways. Regulatory efforts are
finally starting to take root, but it will be many years before the
water from major rivers is truly potable. But China is aggressively
building filtration plants to at least clean up the dirty water so
it is fit for consumption. The Chinese government is increasingly
turning to companies like
Duoyuan Global Water (
. This company makes a range of filtration products, water
softeners and ultra-violet sterilization equipment.
Shares plunged more than -40% on September 13 when
Duoyuan Printing (
owned up to some
problems. The two companies are unrelated except that they have the
same Chairman. As of now, Duoyuan Global Water simply looks guilty
by association. If the company can avoid accounting troubles in
coming months and auditors continue to give it a clean bill of
health, shares should move back up off current lows. More
importantly, the company's products should see considerable demand
for the foreseeable future.
Action to Take -->
These are just a few of the stocks that investors looking at China
should be researching. In many respects, the theme is even more
important than specific stock selection. China's
has become too large to ignore, and many China-focused companies
will see a very long period of sales and profit growth.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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