Three Asian Mega-Trends !
Economics / Analysis & Strategy Dec 15, 2006 - 10:18 PM
I've spent the last 21 days traveling throughout Hong Kong, Tokyo, Shanghai, Singapore, Shekou, Bangkok, Macau, and Shenzhen. My goal: Seeking out the very best investment opportunities. It's been a long and exhausting trip. But I've found dozens of fast-growing businesses with skyrocketing profits. In fact, my biggest problem is that I have to narrow down this big platter of opportunities to just the few very best ideas.
Looking at my list reveals something else, too: Almost all of the companies fall into one of my three “C” categories: Construction, Cargo, and Chuppies. Today, I'd like to explain why these trends are so powerful. And in the process, I'll tell you about some of the most attractive companies I investigated …
Mega Trend #1:
The Construction Crane Is The National Bird of China
China is undergoing a monumental construction boom. I'm not just talking about skyscrapers and high-rise condominiums. The country is building new roads, airports, dams, bridges, railroads, power plants, and water treatment facilities.Why should investors care? Because a handful of companies are going to make a bundle in the process. Here are just four developments that I'm keeping an eye on:
- The largest infrastructure company in all of China is going to go public later this month. I haven't found a better pure play on the China construction boom.
- In every Chinese city I visited, the advice was the same: Don't drink the water! Normally, you'd associate this kind of warning with a Latin American country, but even the most modern cities in China are suffering from an acute lack of potable water. I've got two companies on my list in this area: One supplies water pumps and filters and the other sells bottled water.
- The air quality in China is so horrible that I don't even bother to get a high-floor hotel room anymore. Many Chinese citizens are constantly wearing face masks to protect themselves from the smog emitted by coal-fired power plants and cars. Something has to be done to improve the air quality. In my opinion, the biggest winners will be Chinese natural gas companies.
- Buildable lots are also commanding a premium these days. That's why I'm digging into the books of real estate development companies that own vast swaths of undeveloped land. It isn't easy to assign valuations to these companies because many Chinese firms are financially intertwined with sister and cousin companies. But I specialize in this kind of stuff, which is how I managed to find a few companies with land that's worth many times what the companies' books say.
So don't think for a minute that the construction boom is over. If anything, I think activity will pick up — not slow down — as the 2008 Olympics approach. We still have another year or two left in this cycle, and that's plenty of time for some of these stocks to double.
Mega-Trend #2:
From Factory Floors To Wal-Mart's Stores. China has become the world's manufacturing center. Just go to Wal-Mart and take a look at the items on its shelves. Just about everything you touch will have a “Made in China” label on it.
How do you think all these toys, shoes, shirts, appliances, TVs, and electronic doodads get to Wal-Mart's shelves? Answer: Companies transport the goods from Chinese factory floors to store shelves. And they're making a killing in the process. There are three distinct areas that I like in this space:
Highways: Most packages leave factories in trucks. The problem is that Chinese highways are so clogged with traffic that it can take hours just to go a few miles. The great thing about capitalism is that some clever entrepreneur will see the problem, find a way to solve it, and make money by doing so. In China, the solution to clogged highways is a profitable network of private toll roads.
There are several companies to look at, but one owns the most important links between the major manufacturing parks and the shipping ports. That's the one I'm most interested in.
Railroads: Of course, you can also bypass the highways completely with a railroad. Because they don't have to wait for stoplights or toll booths, trains end up being faster and more cost efficient in a lot of cases. They're often the choice of high-value manufacturers. One railroad company I looked at is enjoying a surge in cargo traffic and raising its prices at the same time. It's no coincidence that profits are going through the roof. Ports: Whether they come by truck or rail, all the goods end up on the docks of a shipping port. Talk about big business! I found one company that owns 26% of the Shanghai port monopoly. Plus, it also owns the busiest port in all of China. I think its shares could triple by the end of this decade. And remember, the best thing about China cargo and transportation stocks is that these companies don't care who makes the fastest computer or the next hot thing. They win simply by transporting all the products to the U.S.
Mega-Trend #3:
Chuppies Make Yuppies Look Like Skinflints
One of the most shocking things about Asia is the enormity of consumption. Everywhere I turned, I saw a store packed with shoppers. Mind you, I'm not talking about el-cheapo street vendors either. I'm talking about stores selling high-end designer names like Tiffany, Louis Vuitton, Hermes, Chanel, and Rolex. I call these shoppers “Chuppies” (Chinese yuppies). And let me tell you, they make U.S. yuppies look like amateurs. Here's what they're spending money on: Cell Phones: Chuppies have to have cell phones … it's a mandatory piece of their uniform. And they don't use them just for talking, either. In China, cell phones have replaced the PC — they are now used for e-mail, text messaging, and Internet surfing. There are several ways to participate in the Chinese cell phone explosion. One stock that my Asia Stock Alert subscribers already own, China Mobile, has surged 70% so far this year! And by the end of the decade, I think it could triple from here.
Hotels: The burgeoning Chinese middle class loves to travel. However, they can't always afford to stay at a Hyatt, Four Seasons, or Ritz Carlton. Instead, they're flocking to a low-priced but spotlessly clean domestic hotel chain that has become the Best Western of China.
Casinos: For many Chinese, the top travel destination is Macau, the only place that offers legalized gambling. Most avoid the high-end western casinos and instead gamble at the traditional, smoky, Chinese casinos instead. Don't get me wrong, U.S. casinos — like The Sands — are doing very well. However, I think a Chinese casino operator is the best gaming opportunity in Macau. This old-line company has filed for a U.S. IPO, but I wouldn't be surprised if an investor who buys its Chinese shares now makes a quick 20%, 30%, even 40% after the U.S. trading debut.
Jewelry: Walk down any main street in China and you'll see dozens (if not hundreds) of jewelry stores. That's because the Chinese love jewelry, which they consider as much a storehouse of wealth as expensive adornments. Once you understand the Chinese perception of jewelry, you'll quickly understand why the industry is reaping such great profits. By the way, Asians like to buy from the biggest, most prestigious companies.
Restaurants: Like their U.S. counterparts, Chuppies love to eat at restaurants. However, many U.S. restaurants have found it difficult to operate in China, and only a few have managed to adapt their menus to the very localized Asian taste buds. What works in America might not work in Asia. In my mind, two American chains have really figured it all out. They're the ones making money like crazy in Asia.
That brings me to my main point: I've seen a lot very promising companies over the last three weeks. And there are very powerful trends ready to power their profits higher. However, not all of these investments will pan out. Not every one of these companies will get it exactly right. And that's why my job isn't done yet.
Before I make any hard-and-fast recommendations, I'm going to get back to Montana and perform some boring-but-crucial number crunching and old-fashioned financial statement reviews. From there, I'll whittle down my list to my absolute best ideas on Asian investing. Stay tuned!
Best wishes,
Tony Sagami
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