Three Profitable Investment Trends in ChinaCompanies / China Stocks Jun 10, 2008 - 08:37 AM GMT
I just returned from China and boy was it an informative trip.
Of course, you have to understand that when I travel to Asia, I don't limit my conversation to just corporate bigwigs. I chat up anybody who can give me information about the economy and that includes people like taxi drivers, bellmen, waitresses, retail clerks, other traveling businesspeople, and even students.
This trip was no exception. In many ways, I learned more from regular, everyday Chinese people on the frontlines than CEOs. Today, I'd like to share three potentially lucrative trends I witnessed firsthand on the streets of China.
Trend #1) A different type of oil.
Oil prices have been dominating the headlines but the average Chinese consumer isn't that concerned about the high price of gasoline. Why not? Because most people in China ride bikes (scooters that get 100 miles a gallon) or use public transportation. So the cost of oil isn't a major issue to them.
There is an oil, however, that the Chinese do care deeply about: cooking oil, the price of which has skyrocketed along with other food products.
|As fields of rapeseed are harvested for bio-fuel, the price of cooking oil has soared across China.|
The latest inflation data for China showed that while overall consumer prices increased by 8.5%, food prices climbed by a whopping 22.1% over the last 12 months. Food inflation is a heck of a lot more important than energy inflation in developing countries because the working class has to spend a disproportionate amount of their income on food.
How can you make money with this trend? My advice would be to give some thought to investing in companies in the Chinese food chain. This includes nearly everything agricultural; seed, fertilizer, and beef/chicken/pork producers. I would also recommend taking a hard look at Real Wealth Report , a newsletter that has absolutely nailed the most profitable way to invest in food stocks.
Trend #2) Aussies, Aussies everywhere .
The number of Australians visiting China — both for business and personal travel — has exploded. I don't know what the exact numbers are, but I was amazed at how many Australians I saw running around China compared to my previous trips.
Being the nosy guy that I am, I talked to every Australian that I could. While every one of them had a different story, I found that many of them were employed in or somehow benefiting from high commodity prices.
Australia is one of the richest natural resource countries in the world and the huge demand for those resources from China has enriched Australia.
How can you make money with this trend? You may want to consider investing in the same Australian companies that are making it possible for all those Australians to visit China: Alumina (AWC), BHP Billiton (BHP), Lihir Gold (LHR), and Rio Tinto (RHP) are just a few examples to consider.
Trend #3) The restaurant business is booming!
For the first time, I was invited into the home of a Chinese family. 'Home' is actually a generous description because nobody — including the fabulously rich — lives in a home. Everybody lives in what we would call a condo and most are so small that there is barely enough room to sleep, let alone cook a meal.
The home I visited had one tiny bathroom, one large communal room that doubled as both a living room and bedroom, and a kitchen that was roughly the size of a small closet. Keep in mind that this layout was crammed into roughly 600 square feet!
" Now you know why we eat out so much. We have no room to cook ," said my host.
It's no wonder that China has four million full-service restaurants, seven times as many as the U.S. And China's 1.4 billion people spent more than 1 trillion yuan (U.S. $126 billion) dining out last year, a 13% increase from 2006 according to the Chinese Ministry of Commerce. Over the last 15 years, restaurant sales have increased by more than 10% a year.
|McDonald's is not the largest U.S. restaurant chain in China. That position belongs to KFC, owned by Yum! Brands, which currently has more than 900 quick-service restaurants.|
How you can make money from this trend? Lots of American restaurant companies are aggressively expanding to China, and none has been more successful than Yum Brands (YUM).
The name may sound funny, but the Little Sheep (0968.HK) is another restaurant chain worth your investigation. Little Sheep is a chain of 'hot pot' restaurants that is famous for its Mongolian-style mutton dishes.
Little Sheep is hugely popular in China. In 2006, it grabbed an amazing 11.8% of all the full-service restaurant business! There are currently only 350 Little Sheep restaurants across China, but the company will be using the proceeds from its recent IPO to finance an aggressive expansion plan. At 27 times 2008 earnings, the stock is a little pricey, so I would wait for a pullback.
My overall conclusion on China ...
Let the indomitable Chinese spirit power your investment returns.
The first thing I saw when I stepped off the plane in Hong Kong was martial arts movie star Jackie Chan singing on TV. Chan, along with 400 other Asian celebrities, were participating in a televised concert to raise funds for Sichuan earthquake relief.
While watching Jackie Chan sing (he isn't bad, by the way), I was struck at how unified a country of 1.4 billion people had become. The death and economic toll are tragic, but the spirit and perseverance of the Chinese people was heartwarming.
That same perseverance is the reason why the Chinese economy is growing so rapidly and the #1 reason I'm so bullish on China. I don't credit the government for embracing capitalism or manufacturers for taking advantage of China's cheap labor. What I credit is the industrious work ethic of the Chinese people I met on my trip, and hundreds of millions of others just like them.
Bottom Line: Make sure your portfolio has a meaningful exposure to China and its industrious Asian neighbors. How meaningful? That depends on your time horizon and tolerance for risk, but I think anybody who has time on his/her side might want to give serious consideration to putting at least 20% of their equity portfolio into Asia. I really believe that Asia may well be the most profitable part of your portfolio going forward.
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