Two Bets on China’s Consumers

09/25/2008 12:00 am EST

Focus: STOCKS

John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, likes two stocks that profit from China’s rising consumption.

The real story of China's market is ultimately about the emergence of the world's largest consumer class and the new entrepreneurs serving them.

According to McKinsey forecasts, China will be the world's biggest consumer market by 2025, with some 500 million middle-class consumers. Of course, China still has a long way to go. Today, the Chinese per capita income is only about $2,000 per year.

That's not a lot of money to live on, but according to Credit Suisse, the $2,000 threshold historically marks the tipping point when most economies begin to move to a consumer-driven economy. It happened to the US in the 1950s and Japan in the 1970s.

Investors who choose to ignore China altogether, or who settle for modest exposure though a mutual fund, risk missing out on one of the greatest investment opportunities of lifetime. While 2008 has been a rough year for Chinese stocks, this is not the time to throw in the towel. China has rebounded from tough times before and it will again.

VisionChina Media (Nasdaq: VISN) sells advertising space on small flat-panel television screens that are mounted inside buses and subway platforms. Its network covers 25,000 buses in 14 major cities in China. VISN went public on Nasdaq in December 2007, but the timing was lousy. Shares plunged out of the gates, but that appears attributable to general market sentiment than anything specific to VISN.

In its most recent quarter, VISN delivered sequential revenue growth of nearly 50% compared with its previous quarter. Net income rose more than 50% on a sequential basis. Net margins were a robust 42%. (The stock traded near $16 Wednesday—Editor.)

The Chinese education ethic intersects with the country's recent embrace of capitalism in New Oriental Education (NYSE: EDU), China's leading private education company. Founded in 1993, New Oriental is one of China's great entrepreneurial success stories, making its founder and chief executive officer Michael Yu a billionaire.

The company operates a network of nearly 250 schools and learning centers in 38 cities across China. These schools teach English, foreign languages, test preparation, and more. (Think of it as a cross between Berlitz and Kaplan, but with a much bigger target audience.)

At a recent $70, New Oriental sells for 40x analyst forecasts for fiscal 2009 earnings. While that's not as cheap as some of the other [Chinese stocks we like,] New Oriental has a dominant position in its market and a history of delivering growth. Earnings are expected to grow 50% next year.

And thanks to the high priority that many Chinese place on education, New Oriental's services aren't as much of a "discretionary" purchase as they might seem. Demand for most of New Oriental's courses should hold up well even if China's economy cools.
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