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3 Ways to Profit on China's Income Explosion

03/11/2011 2:52 pm EST


Hilary Kramer

Editor, GameChanger Stocks

While the most striking growth may have come and gone for China, hundreds of millions of Chinese have significant disposable income for the first time, so opportunities still abound. In an exclusive interview with, Hilary Kramer, editor of GameChangers, shares her top three picks.

Hilary, you recently wrote in your newsletter a piece about China, and I have to say quite honestly it struck me as something that could have been written anytime over the last few years—because as we know, China has been a big, big growth story, but you’re bullish on China now.

What about China now appeals to you as a stock investor?

Well, the consumer. The growing consumer in China, and the fact that the MSCI emerging-markets index is down over 4% versus the S&P 500, which has gapped up by 5%.

In China, there are concerns over tightening, and we’ve already seen interest rates raised, and there are concerns about the real-estate bubble—some of the smartest money out there is shorting real estate in China.

It’s an opportunity to still invest in this growing consumer base of people that finally have money and income to spend.

Now, the Chinese stock market peaked at around 6,000 in October 2007. It’s about 2,700 as we speak, and it didn’t get above 3,000. I mean, if you look back over three years, wouldn’t you call that a secular bear market?

Yes, but that’s because there’s been so much money that has flowed to other places—and fear, recession, concern—and interest in trying to be in the US market. The China bubble concern is very strong, but there is opportunity still in China. There is opportunity to make money.

You have set the example by explaining how much that market is down. Now, Nasdaq is still almost 50% off its peak, and it’s ten years later.

But, China is an economy that continues to grow—and as they change their laws and allow people to make money, we come up with promising companies like China Nepstar (NYSE: NPD). This is a drugstore chain that’s growing across China. It’s the Rite Aid, CVS, or Walgreens of China.

The Chinese people used to go to hospitals to have their prescriptions filled, not that they had money for even diapers, for example.

Now, they’re buying those toiletries and goods in drugstores. And the government—this is why others have to watch regulatory changes within any kind of geography—is encouraging the use of drugstores for fulfilling medications, rather than the hospitals.

What other companies do you like in China?

There is a biotechnology company, 3S Bio (Nasdaq: SSRX). This is a biotech company that is developing drugs for anemia, as well as oncology.

Anemia is a major problem today because people have chronic diseases—in the US, anemia strikes upwards of 70% of gastric-bypass patients. This is a company that’s developing. They’re in the equivalent of stage-3 trials for these drugs.

And in China, the cost of production is cheaper, the competition is lower for serving within China, and then there’s the opportunity to export outside the borders.

Just out of curiosity—I could see the consumer thesis in China…we actually were in China last year and saw this first hand—but how do you evaluate a biotechnology company in China?

Again, it really goes back to talking to those that are looking at biotechnology; that are in the field. Those that are in the government or serving on different committees, as part of healthcare and biotechnology research organizations, attending conferences, and watching the data as it is presented.

Remember, the internet has made a big difference in terms of the flow of information. Companies are found out much quicker now in the biotechnology world.

But I’m just wondering if the standards of biotechnology—with all the problems we’ve seen in Chinese products—whether that is something that is really on a par with what we see here.

That is built into the stock, which is why there is an opportunity here. I mean, could this be the next Biogen—which has now been acquired—but could it be? Yes, it’s possible we’re going to see that.

I’ll give you an example of another company—think about Sinopec (NYSE: SNP). That’s a large major oil company. It’s a $90-billion-dollar oil company. There is opportunity.

This isn’t going to be a double. Maybe at just a little over $100 a share. I mean, it’s traded back off over the past few days, but in the $100 to $110 range, we could see $120 to $130 over the next 18 months. There is a dividend yield—and what I like about Sinopec is that they’re in Canada now, in where we call the tar sands.

The oil sands.
Yeah, and so we’re going to see pipelines built. The big problem Canada has had is getting that oil out of Canada into anywhere other than the United States, and now we’re going to see it go to China.

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