The Best "China in America" Play
03/18/2005 12:00 am EST
Many investors mistakenly believe that they need to invest in riskier foreign stocks to benefit from the growth in China. But Don Straszheim looks at major US firms poised to benefit from operations in that region. Here, he looks at what he calls the best ‘China in America’ play.
"Yum! Brands (YUM NYSE) is the world’s largest restaurant company and in our opinion, the best fast-food operator. It has more than 33,000 restaurants (21,000 franchised) in over 100 countries and territories. Its four restaurant brands (KFC, Long John Silver’s, Pizza Hut, and Taco Bell) are global leaders in quick-service chicken, seafood, pizza, and Mexican-style fast food. The company is a highly experienced operator in China with a great track since it began operations there in 1987. It has a strong record there of success and expansion.
"To YUM, China is already highly significant and growing rapidly. China is a very profitable country for YUM, with much more room to grow. There are 300 million people in America. Meanwhile, there are 500 million urban residents in China. There are 82 cities in the US with populations of 200,000 or more; in China there are 273. I'd also note recognizable western names such as this firm's brands, are a plus in the China market. It is viewed as a good corporate citizen, bringing western ‘culture’ to the area. YUM's brands are also sought after in the rural/inland areas, where there is an expanding middle-class market.
"China is YUM’s most rapidly expanding international market and the company has publicly identified China as its future growth focus. In 2004, the company opened 334 restaurants in China versus 373 new units in the US. It has 1,416 stores in China now versus roughly 600 for McDonald’s, which is in second place. In China, chicken is generally preferred meat to beef, which is a significant and lasting advantage to YUM in their rivalry with McDonald's. YUM’s current plans are to open 1,000 new international restaurants annually, with at least 350 of those units in China. Currently I’d add that as of February 1, 2005, China liberalized franchising rules, which should provide more opportunity to YUM.
"In 1998, China was trivial to the company, as the US was 98% of profits. In 2004, China was 15% of YUM’s operating profits. YUM now estimates that China will represent 25% of its overall profits by 2007. We expect this share to be even larger as they see the market develop, likely deploying more capital to the China opportunity. In our view, there is no better ‘China play in America’ than NYSE-listed YUM."