China: Threat or Opportunity?
10/15/2004 12:00 am EST
Although his Straszheim Global Advisors is headquartered in LA, the firm has offices in Beijing, Hong Kong, and Shaanxi. Why? Don Straszheim says, "Because that’s where the action is." Here’s his outlook and some of his favored ways to invest in this region.
"I’m a big China fan. China is careening down the path to a market economy— with a long way to go, but with no turning back. Every company in the world realizes that China is either a threat or an opportunity, or as is the case for most, a threat and an opportunity, depending upon which part of the business you want to consider. If you ask the CEOs of the thousands of public companies, ‘What is the one thing that is going to change your business more than any other factor in the next decade?’ the most common answer would be ‘China.’ That’s why we focus on it.
"Last year, Wal-Mart imported $15 billion worth of products from China alone. If Wal-Mart were a country, it would be China’s fifth largest trading partner. Volkswagen last year sold more cars in China than in Germany. Starbucks will probably open more stores in China in the next five years than in the rest of the world put together. Two years ago, Home Depot imported 100,000 cargo ship containers with products to be sold to you and me. Next year, the estimate is for 300,000. In the retailing area, in the old days the winners were the best merchandisers. In the new era, the winners in retailing are those who are the best in-sourcers— the best at buying those products from aboard at the cheapest prices. You cannot be a serious investor, in my view, without thinking about China.
"The Chinese are the most entrepreneurial people in the world. I spend about 60 days each year there. ‘Let’s make money’ is the rule that drives China. China will be far more important to our future than Japan has been in the last 20 or 30 years. China’s growth rate is 9% a year for the last 25 years. Year after year, there is doubt about this growth. Don’t worry about it. It is an economy that is growing at a very rapid pace. Is it real? Yes. All you have to do is see the number of bicycles that have been replaced by motorbikes, and the number of motorbikes replaced by cars. China is not overheated. It has imbalances, but they can sustain this type of growth for a long time to come. It doesn’t mean there won’t be downturns now and then. It’s a big job to transform an economy from ‘command and control’ into a market economy. There’s no textbook about how to do this. So there will be slips along the way. But they are committed down that path.
"One of the keys to China’s success is foreign direct investment inflows. The secret is out. These are people voting with their money. There are enormous inflows of money from abroad. I’m not talking about portfolio flows. I’m talking about real investment plants on the ground. It’s not hot money. It’s real investment. There is also very little capital outflows from China to the rest of the world. Why? Because the people in China know that the best opportunities are there. I’d go as far as saying that any company whose stock you own that is not involved with China either as a source or as a market or that does not have a coherent China strategy for the future ought to be sold. That’s how important China is.
"I’d emphasize that you don’t have to buy a Chinese stock to invest in China. You can buy US companies that have exposure to China. And for now, that’s the best way to capitalize on this opportunity. I’d like to mention three domestic companies: Wynn Resorts (WYNN NASDAQ) is a gambling company operated by Steven Wynn. This is a China play, as the casino company has one of the three licenses for gambling activity in Macau, right outside of Hong Kong. Macau is going to become bigger than Las Vegas in a decade. We see fantastic growth there. UTStarcom (UTSI NASDAQ) is a wireless communications company located right here in San Francisco. But 90% of their revenues are from China. The stock has been beaten down in the last year. It’s about $14, down from $40. Shanda Interactive (SNDA NASDAQ) is an interactive online gaming company in China.
"I also like two exchange traded funds that have exposure to growth in China—Taiwan iShares (EWT ASE) and Hong Kong iShares (EWH ASE). I regard both of these as good back-door plays on China. Everybody knows that China is becoming a more important factor in the global economy and many people are still afraid—properly so— of investing directly in Chinese companies. These funds will give you the higher protection of the Hong Kong, Taiwan, or American listing standards."
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