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Published: September 21, 2010
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 of
GDP.
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 Fleishmann-Hillard.
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 flourish.
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
earnings. 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 bottom-line results.
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 (EPS) estimates have steadily risen
during that time frame. The company's
balance sheet is helping to support shares, as management
has recently announced a series of stock buybacks. This is a
solid, unsexy play on the Chinese consumer.
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 itself.
Water treatment
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 (NYSE: DGW). 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 (NYSE: DYP) owned up to some
accounting 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 economy has
become too large to ignore, and many China-focused companies
will see a very long period of sales and profit growth.
-- David Sterman
Staff Writer
StreetAuthority
P.S. -- There's an analyst with a track record you need
to see. She has an 89% win rate -- remarkable for this market.
And she just keeps picking winners. One of her recent picks shot
up +18.2% in just 13 days.
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