Karen Fitz Ritson contributes to "How to Invest in Asia"
To see the article, as published on Friday April 28th, 2006, click here.
Below is the full text of the article submitted by Karen Fitz Ritson to the Gleaner. Exerpts from this article were used in the piece published in the Gleaner.
Investing Opportunities in China – Asia
The “Chinese Miracle” is one of the world’s most sought after and dynamic phenomenons of our times. The emerging BRIC economies (Brazil, Russia, India and China) are forcing the world to take notice of them and as Robert Hsu (former hedge fund manager of Goldman Sachs) stated that by 2041 China will surpass the US economy making it the nation with the strongest demand for natural resources such thus propelling the upward price movements of traded commodities.
The objective of this article is to prepare the foundations to spot trends to make strategic investment choices with the view of sustained investment opportunities however to gain such insight there are many lessons to be learnt the first being the ability to comprehend key macro economic factors about the Chinese economy:
1. The economy has been growing at a rate of 9.3% per annum for the past 25 years (i.e. 3x the growth rate of the US)
2. They are the world’s largest consumer of steel, cement, coal copper, gold and meat and the next largest consumer of crude oil (note that based on their consumption pattern this has driven the commodities boom in copper. steel and oil since 2002)
3. The combined central banks of China, Hong Kong and Taiwan have the largest foreign reserves in the world.
Against this backdrop any fund manager or investment research analyst worth their salt needs to obey the foundation philosophies of Sun Tsu who stated “We are not fit to lead an army on the march unless we are familiar with the face of the country – its mountains and forests…… we shall be unable to turn natural advantages to account unless we make use of local guides”. Very sound advice when venturing into investing in foreign territories.
Hsu teaches us that one of the things we need to avoid in investing in China is State Owned Enterprises – they have low corporate governance, little to no share holder rights, lack of accounting standards, thus susceptible to corporate fraud which is not uncommon and an undeveloped legal system to gain restitution. Thus state owned companies not listed on the Hong Kong or New York Stock Exchange are the companies that you should avoid.
It was also noted that companies traded on the H index of the Hong Kong Stock exchange grew by 160% over the last three years as compared to companies listed on the Chinese Mainland exchanges of Shenzhan and Shanghai which declined for the corresponding period by 30%. One main factor contributing to this performance is that these companies are trading at P/E ratios of 56x as compared to their US counterpart SP500 which is 16x.Thus demonstrating that this performance has more or less peaked as compared to its counterpart in Hong Kong whose average P/E is 10x thus demonstrating the potential growth of these companies.
This is one guideline to position yourself in investing in China however one needs to also examine the cultural landscape and look at the taste and trends of the Chinese people especially the affluent to discover the potential investment opportunities.
Niche Market Investments
The young affluent are very high tech savvy and like to download music to their cell phones. Therefore entrepreneur Wan Lei Lei is the Leader in the Chinese markets of music downloads and it is an explosive trend to date.
Taking hot showers is still a luxury in China and with the challenges of astronomical fuel prices an undiscovered solar panel company in China is booming with sales in solar units in rural China with the potential to be a $1.0 billion business in sales over the next 2 -3 years. Research has shown that by 2008 this will be the biggest alternative in the energy market.
Yoa Wenchen owns a sporting good store and has capitalized on a favourite Chinese pass time of playing cards. Chinese however are disgruntled on the flimsy decks manufactured by the state owned companies and he has created a $300m business opportunity by manufacturing high quality decks of cards and also supplies cards to Las Vegas.
Pit falls to avoid
The “Chinese Miracle” has opened the doors to many international companies who go there to penetrate the market share. For example:
Starbucks coffee – the Chinese do not hold a cultural taste for coffee as Americans do and its business appears to be only successful in Taiwan.
Mc Donald’s Restaurant – this is running a distant number three behind Yum! Brands’ Kentucky Fried Chicken and a local franchise called Little Lamb Mongolian Hot Pot, despite aggressive marketing to children it is still slowing down.
Petroleum companies in China have also not done the necessary exploration and production to keep up with the necessary demand therefore China has several power outages which has created growth opportunities for the wax industry to supply candles.
In conclusion when examining the “Chinese Miracle” one needs to fully comprehend the landscape that will promote lucrative opportunities. Cultural taste and changes in trends are always key factors to benchmark when looking for potential growth opportunities. Learn from the mistakes of others (e.g. heavily investments in state owned companies) and keenly research companies that are reputable and have sound corporate governance and business practices that will make their operations sustainable in the years to come.
