U.S-listed Chinese Consumer Stocks Have a Bright Future
posted by The Traveller on Tuesday, November 02, 2010

I believe investors should own U.S.-listed Chinese stocks that are focused on domestic consumption. Those stocks will see double benefits from current developments and it is hard to imagine that investors won't see stellar returns with a buy-and-hold strategy with Chinese consumer stocks. Here's why:

China is in the midst of a gigantic transition from the world's number one exporter and producer of goods to the leading consumer nation of the planet. While its general economy grows 8-10% per year, domestic consumption already grew about 18% year-to-date. We get widespread reports about rising wages in China and about government incentives to further stimulate the domestic economy. However, the domestic economy is nowhere close to being strong enough to compensate the negative impact on international trade if China continues to appreciate its currency. More aggressive measures to strengthen domestic consumption are very likely at this point.

The rising Yuan is the driving force behind these developments. China is facing enormous pressure from all its trade partners to appreciate its currency, but instead of opting for a rapid full appreciation, China is looking at gradual appreciation of up to 5% each year for the next several years. Auriga came out with a note this week, estimating the total scale of appreciation to be between 25% and 40% in five years. The firm calls gradual appreciation a "determined government policy" and "too big to ignore" for investors.

Chinese companies targeting domestic consumers will find have a larger market for their products with strong and sustainable growth. They will have more potential clients and customers and those will have deeper pockets. Underdeveloped industries like domestic and international travel, luxury goods, entertainment and advertising will rise out of infancy, and purchasers of manufactured goods - especially in rural China - will benefit from subsidies and government stimulus.

The double benefit for U.S.-listed Chinese companies is of course the stronger Yuan. Those companies derive their revenue in Chinese Yuan and report their numbers in U.S. Dollar. Additionally to generating higher revenues and earnings in Yuan those will be worth more in U.S. currency, and 25-40% is a significant amount. And don't forget that the Yuan appreciation will also affect most of the companies' assets.

It's almost a "no-brainer," however the key to success for investors is to pick quality names, companies that are all set to benefit from these developments. Look for healthy quality stocks in industries like advertising, meat processing, agriculture, travel, entertainment, home appliances, automobiles, liquors, gambling, and there should be many more.

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At November 02, 2010 5:27 pm , Anonymous Anonymous said...

Look at American Lorain, this company can profit at high speed.

At November 05, 2010 9:24 am , Anonymous Anonymous said...

I think LED sector is an overlooked sector with tremendous potential.
the american LED companies are flying like CREE.
Why not CIL for instance ? CIL was an IPO in June 2010.
CIL is the only LED company in the us exchanges with 2010 eps around 0,75 $. it is currently in expansion mode of 40% by the end of this year.

WEMU.OB is also an emerging solar module manufacturer priced ridiculously low imho. estimaated eps for 2010 around 1,30 $.
The solar companies of the major listings have average pe = 15.

At November 05, 2010 8:33 pm , Blogger The Traveller said...

CIL could be interesting. I like the Hyundai connection, but I have yet to understand how strong the position of CIL in this highly competitive - highly fragmented market really is.

WEMU has been deceptive in the past. Talking up their stock with premature assumptions (guidance) and promises (uplisting). They have also beautified their earnings releases by hiding non-cash gains in the cash flow statement and so forth. I once believed them, not anymore. The extremely competitive solar industry is making it very hard for tiny players like WEMU (or SOPW, SOEN, ESLR etc.), it would be silly to compare their valuation with YGE or TSL, they play in an entirely different league. Look at TSL, JASO or SOL if you want exposure to solar stocks, they are all trading at low multiples for FY11 now.

At November 07, 2010 10:45 pm , Anonymous Anonymous said...

ENHB.OB = Meat processor with green certification, trading below book value, healthy growth, very very low PE. ''Our production lines are imported from international manufacturing automation leader Storkā„¢ of the Netherlands''

the latest 10-K gives historical audited numbers back to 2005:


PS: I'm long!


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