by Will Ashworth | June 6, 2013 1:47 pm
The recent news concerning Chinese stocks hasn’t exactly been positive. It has become painfully obvious that China’s once overheated economy is no more. Economists expect less than 8% GDP growth in 2013, its slowest pace since 1999.
A sign of the times: iShares’ MSCI China ETF (MCHI) is down 9% year-to-date against a roaring S&P 500 that has gained 13% in that time frame.
Despite the doom and gloom, though, I still think there are a few Chinese stocks worth buying today. Regardless of the situation overseas, I see all three of these companies beating the odds during the next 12 months:
An industry that’s experiencing growth in China is asset management, where regulatory reform is happening at a blistering pace. One of the most aggressive companies in the field is Noah Holdings (NOAH), a Shanghai-based wealth management firm focusing on high-net-worth individuals.
NOAH has grown considerably since its inception in 2005. In the past five years, its net revenue has gone from $3.2 million in 2007 to $86.7 million in 2012. Meanwhile, its operating profit over those five years has increased 2,900% to $25.8 million.
Trading as an American Depositary Share on the NYSE, two ADSs represent one regular share in the company. Since its Nov. 10, 2010, IPO at $12, NOAH’s stock has been on a roller-coaster ride — shares have been as high as $20.58 at the end of 2010, and as low as $4.32 in September 2012. From that low through today, however, it has nearly tripled back to $12.85.
Sequoia Capital — the venture capitalists behind Tumblr, which recently was sold to Yahoo (YHOO) for $1.1 billion — invested $3.9 million in Noah Holdings in September 2007 and currently owns 21.6% of its stock.
The most compelling reason for investing in Noah Holdings is its revenue structure, which has evolved over time since its inception. Three years ago it earned 77.2% of its revenue from one-time commissions from the third-party firms it represented, with the remainder in recurring service fees. Today, it earns almost 46% of its revenue from recurring service fees. Also, in 2012 it began generating mutual fund service fees thanks to the China Securities Regulatory Commission granting it a mutual fund distribution license.
With 40,305 clients at the end of December, Noah has a bright future ahead of it. Buy now while it’s still priced out of the teens.
My second selection finds me very thirsty, what with summer just around the corner.
Tsingtao Brewery (TSGTF) is China’s second-largest brewer with 16% market share, second only to China Resources Enterprise‘s (CRHKY) Snow brand at 21%. The Chinese beer market eclipsed the U.S. as the world’s largest in 2012, producing 49 million kiloliters. In terms of per capita beer consumption, China’s is expected to grow to double that of the U.S., making it a very lucrative market.
Long-term, Tsingtao has seriously outperformed its brewery peers, though its annual return in the past three years has been 2,200 basis points lower than those same peers.
However, TSGTF has been performing well in 2013, up 17% YTD. One reason is that Japan’s Asahi Group (ASBRF) owns 20% of Tsingtao and eventually could be a buyer of the entire company. Another reason is its first-quarter net profit increased 8.3% as demand for its premium products helped increase margins.
In Q1, Tsingtao produced 18.3 million hectoliters — 11.7% higher than in 2012 — which led to a revenue increase of 12.7% to $1.03 billion. Although its Tsingtao brand did well in the quarter, the real grower was its draft beer, which saw a 20.6% year-over-year increase to 3.75 million hectoliters. Premium draft beer accounts for just 5% of its overall beer market compared to 30% in the U.S. and even higher in Europe, so it has plenty of room for growth here.
Like India with liquor, I see the Chinese beer market filled with tremendous potential. Someday, one of the big boys is going to come knocking on Tsingtao’s door to ensure its presence at China’s table. When that happens, rest assured it will be for a handsome premium.
My wife really like shoes, so she’ll be really excited about my third pick — Belle International Holdings (BELLY) — the largest retailer of women’s shoes in the People’s Republic of China.
Although not well-known in North America, Interbrand ranks Belle the eighth-most popular retail brand in Asia. In fact, its multi-brand strategy has it dominating the Chinese market with six (including the top three) of its brands occupying the top 10 positions in terms of revenue. Selling both its own brands — as well as those of other big shoe companies like Clarks, Mephisto and Nike (NKE) — Belle does a good job providing Chinese consumers with a variety of styles and trends.
In its latest fiscal year ended Dec. 31, Belle’s revenue increased 13.5% to $5.4 billion with an operating profit of $880 million. Company-owned brands accounted for 57% of its overall revenue in 2012, growing 12% YOY. Thanks to its vertically integrated business model, BELLY was able to grow operating cash by 63% in 2012 to $1 billion.
At the end of March, Belle announced same-store sales in footwear of 4.5% combined with 11% growth for sportswear. Business is more than solid, yet its stock is down 32% year-to-date. This should change sooner than later.
Although you can never be entirely sure when dealing with Chinese companies, Belle seems like a good bet on a rising middle class.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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