Oxstones Investment Club™By Russell Flannery, Forbes Blog,
China can be murky enough for investors that live on the ground in the country. From afar, things can’t get any better. What approach can an overseas investor looking to profit from its growth follow?
You could do far worse than to simply “think big.” China’s government economic planners usually do; you can, too. That means, as a first step, look for some of the biggest Chinese successes in key industries. Many industry leaders in China have risen through a tough business landscape, and have some sort of decent relationship with the government, an all-important point in China.
Then, follow the idea another step. Besides largess or market share in China, look for companies that rank high in their industry globally. China is teaming with multinational companies looking to grow with its economy. If a domestic company is a heavyweight in China and also has some of the same heft as a multinational rival, that may suggest that it has enough economics of scale — or at least potential economies of scale — to go the distance against bigger international rivals. Finally, there’s another step to thinking big approach: look for industries with relatively large growth rates and where a leader can take advantage of its heft.
Because China’s market reforms have been unfolding for three decades now, you don’t have to look too far for companies that have built up relatively large sales or market share and clawed their way toward the top. And because of the increasingly large size of China’s economy, many of the country’s own industry leaders already rank among the world leaders. A helpful research tool might be the Forbes Global 2000 List edited by my colleague Scott DeCarlo: It analyzes the performance of a large number of businesses and industries worldwide head-to-head. And what about finding growing industries in China? With an economy that expanded by more than 10% last year, you don’t have to look far, either.
Another merit of looking around for leaders: many can be bought by individual foreign individual investors at U.S. stock exchanges or in Hong Kong. And in earnings terms, they may not be any more expensive than slower-growing multinationals.
Consider Internet-related businesses. China is home to one of the world’s fastest-growing Internet markets. Have a look at www.alexa.com, go to its rank of the world’s most popular websites, and check how many are from China. Search engine Baidu trades in the U.S., and gaming company Tencent (also known as “QQ”) trades in Hong Kong. China’s Internet leaders are all slugging it out against each other but have a lot of momentum and are recognized brands among the country’s increasingly well-off population of Internet users.
China’s big financial service companies face a lot of policy risk, but they are entrenched in an industry that’s underpinned by solid growth prospects. The market for insurance is still nascent, for instance. At the same time, many of its Chinese leaders already rank among the world’s largest, with resources and smarts to invest in their own future. China Life, one of the country’s big three insurers, conveniently trades in New York. Another big player — Ping An Insurance — is partly owned by HSBC, not a bad partner to have looking over the company’s books if you’re a small-fish foreign investors. You can buy its shares in Hong Kong.
The list of Chinese companies with good market share at home, global heft and decent growth is long and growing. Companies like China Shenhua (listed in Hong Kong) and Yanzhou Coal (NYSE) are among the biggest globally in the coal industry; China Mobile is the world’s largest mobile phone companies and its shares can be purchased in New York. Somehow, it’s hard to call some of these companies “blue chips,” but they count as important in their industry, they’ve been around, and they’re poised to benefit from China’s growth.
Of course, not all big companies in China are healthy, especially murky state-owned ones, and there are political risks everywhere owing to the murkiness of China ’s political system and state control over the media and the judiciary. Yet investors that have done homework about the universe of larger businesses in the country and understand the global industry they operate in in many cases have decent returns to show. There are many ways to approach investing in China’s growth; buying shares in proven winners may be one to consider.
Tags: Asia, asian equities, Baidu, bidu, China, china's government economic planners, chinese blue chips, chinese multinationals, chinese stocks, CHL, economies of scale, HSBC, industry leaders, LFC, Ping An Insurance, political risks, Tencent, think big, YZC