by Jim Woods | November 18, 2013 8:03 am
The world’s second-largest economy is getting a makeover.
The latest from China’s leadership represents some pretty dramatic changes to be implemented under new President Xi Jinping. Perhaps the most noteworthy change is a loosening of the country’s one-child policy. The new reforms would allow couples to have two children if one of the parents is an only child.
But the most encouraging, and most investable, reform goal coming from the latest meeting might have been China’s realization that it needs to further balance and mature the Chinese economy. China recognizes the need to change from an export-driven economy (meaning the world’s factory) to one that also has a strong consumer demand element to it (similar to what happened in the U.S. in the years following the Industrial Revolution in the late 19th and early 20th centuries).
From a long-term investment perspective, this means you should to move away from the thesis that says you should “buy what China buys,” (i.e., industrial metals such as copper and steel), and “buy what the Chinese consumer buys.”
To those of us who are more familiar with China’s economy, that thesis isn’t anything new. However, the latest China reforms cement the notion, making a bullish argument for many Chinese stocks — particularly those that tap into the rise of the middle-class consumer.
Here are five Chinese stocks to play the recent reforms.
Chinese citizens love the Internet, mobile devices and social networking. One company perfectly positioned in this space is the “Chinese Twitter,” a.k.a. Sina (SINA).
On Wednesday, Nov. 13, Sina stock spiked some 13% after the company reported blowout Q3 earnings and revenue. The Chinese Internet portal and micro-blogging service reported adjusted EPS of 37 cents per share and revenue of $184.6 million. Both metrics came in firmly above consensus estimates, as did the company’s raised Q4 guidance.
Although there has been a slowdown in economic growth in China, that slowdown hasn’t affected China’s Internet and social networking embrace … and that’s good news for SINA.
A growing China middle class means a growing need for entertainment, and that means more Chinese are going to be headed to movie theaters.
One company making big profits via making must-see movies is Bona Film Group (BONA).
The company just released its Q3 earnings, which showed a 42.3% year-over-year boost in net revenue and a 45.8% surge in Q3 gross profit. EPS for the quarter came in at 5 cents, well above the 2 cents per share earned in the same quarter last year. Although both revenue and EPS were just slightly below expectations, the stock hasn’t slowed a bit.
Year-to-date, BONA shares are up more than 30%, and that ride is likely to continue as more Chinese head to the movies.
Shopping for goods online is something most Americans are comfortable with thanks in large part to Amazon.com (AMZN). Well, China has its own Amazon, and it’s called E-commerce China Dangdang (DANG), or simply Dangdang.
The company now is the largest e-commerce retailer in the country, and it bears quite a resemblance to Amazon. In fact, Dangdang first began as a bookselling site just like Amazon, and then it quickly branched out into selling all sorts of consumer products.
What I think is a great investment thesis here is the potential for huge growth in the years to come. According to a recent report from private equity firm Bain & Company, in 2012, Chinese e-commerce shoppers spent RMB 1.3 trillion online. That number has grown at pace of more than 70% annually since 2009. Bain wrote that it expects this growth to continue, and reach some RMB 3.3 trillion by 2015.
Indeed, the Chinese consumer is increasingly going digital, and DANG is a great way to ride that wave.
In addition to using social media and buying things online, Chinese consumers also want to travel. Indeed, the Chinese travel bug has bitten many in the new middle class, and feeding that bug is travel booking firm Ctrip.com International (CTRP).
Ctrip helps Chinese tourists book flights, hotels and vacations around the world. This industry is simply huge, with some 83 million Chinese spending more than $100 billion on travel last year, according to industry estimates. This trend is expected to continue growing well into the next decade, and at the center of this boom is Ctrip.com.
The company just reported a 92% rise in Q3 net income year-over-year — a metric fueled by a sharp increase in travel-package and hotel bookings. Adjusted EPS for the third quarter came in at 51 cents, well above the 41 cents per share Wall Street was anticipating.
As China transitions into a domestic-oriented economy, more money will be spent on travel — and at Ctrip.com.
One of my favorite ways to play the China consumer is via the Global X China Consumer ETF (CHIQ). This exchange-traded fund holds China-based companies that provide a variety of goods and services to Chinese citizens, including companies in the auto, healthcare, food and even jewelry sectors.
The fund seeks investment results that correspond to the price and yield performance of the Solactive China Consumer Index, which is comprised of companies which have their main business operations in the China consumer sector.
Top holdings in the fund include gaming operator Melco Crown Entertainment (MPEL), automaker Great Wall Motor Co. (GWLLF) and beer-maker Tsingtao Brewery (TSGTY).
CHIQ is a way to play the China consumer field without having to hit a home run in one stock.
As of this writing, Jim Woods was long CHIQ.
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