Profiting from China's Rise
02/08/2008 12:00 am EST
John Dessauer,editor of John Dessauer’s Investor’s World, and
Robert Hsu, editor of China Strategy and Asia Edge, explained why they believe the Chinese market is still attractive…
John Dessauer opened the workshop by contrasting his and Robert Hsu’s approaches to investing in China, noting that he seeks investments in multi-national companies that are doing business in China while Hsu’s team is looking for firms that are doing significant business in China but are listed on exchanges outside the country.
Dessauer thinks that China’s huge population is very motivated toward growth and that motivation is what will continue to drive the country’s prosperity.
Hsu believes what is taking place in mainland China today is akin to the rapid changes that Taiwan experienced 20 to 30 years ago. He believes that companies listed on Chinese exchanges are trading at high valuations, which is why he thinks that the best companies in China are listed outside China.
Hsu is a top-down investor, beginning at a macro level, finding countries with strong economic growth and currencies, growing industries, then finally arriving at companies who have sustainable competitive advantages.
He noted that the US dollar has declined some 40% since 2002, a trend he believes will persist as long as the Fed continues to cut interest rates. At the same time, the Euro zone and China continue to maintain higher rates.
And while both the US and China each contributed about 18% to global economic growth in 2007, for 2008, Hsu believes that China will eventually take the lead.
In choosing investments, Hsu advised looking for companies that get at least 15% to 20% of revenue from doing business in China. One of his favorite recommendations has been Yum! Brands (Nyse: YUM), the holding company for KFC and Pizza Hut, and the number one restaurant chain in China today. KFC has 2,200 locations and Pizza Hut, 450, and the chain is posting 15% annual growth in China.
Dessauer asked Hsu whether Chinese companies were going to get so good at what they do for Americans that they will eventually become ferocious competitors, diminishing the value of US companies.
He responded that he doesn’t foresee that problem, as most American companies make their money from branding, which the Chinese are not very good at. Hsu suggested that investors must understand that divisions of labor and supply chains tend to be global in scope. We must ask ourselves, how can we best use all of the world’s resources to our advantage?
He wrapped up by saying that the recent sell-off in stocks has left Chinese stocks trading on the Hong Kong and New York Stock Exchanges at levels discounted by 45%, compared to where they were last October. The weighted average price-earnings ratios are 21x to 22x, making their risk/reward ratios very attractive, as these companies have seen earnings growth of 5% to 10% in the last few months.