Q&A with David Riedel, China Investment Opportunities
Q: What is investor sentiment towards China right now?
A: Everyone knows that they need to be involved in China for the near term, the medium term and the longer term. There's no question in anyone's mind from an individual or institutional point of view that everyone does need to be involved. The question is in what sectors and in what way. Over the last year when you had the Chinese markets really wake up domestically and start to catch up to some of these strong trends that you've seen in the emerging markets in the last 4-5 years, investors have made a lot of money and that will continue to be the trend.
Even if you look at the more recent trends, since August 20 the Hong Kong market, which is a great proxy for China, is up 50%, and if you look year to date the Shanghai market is up over 100%. So, a lot of money has been made. The question is what do we look for going forward. And I think that you'll continue to hear from us at Riedel Research and in the China Investment Opportunities newsletter about domestically oriented plays that give you a play on the consumer in China.
Q: What are some of these names?
A: Two of our recommendations that have done very ell this year are Focus Media (FMCN) and Shanda Interactive (SNDA), both of which are good plays on continued consumer spending in China and both of which have about doubled since we first highlighted them in the newsletter earlier this year. People who have visited China recently will certainly agree with me that there is a tremendous opportunity as the entire population of China becomes more wealthy and raises their standard of living and starts consuming things like Internet services and mobile phones and even consumer goods, which is supported by advertising (the focus of FMCN), it really raises the economy to a whole different level. So I think a lot of money has been made so far in China but there's a lot more to go, because even just a slight growth of consumption by this huge population really does boost the outlook of many companies.
Q: An article Monday in the Wall Street Journal says that a lot of Chinese companies listed in the U.S. have a big void in research and understanding of these companies. Are you finding that to be the case?
A: That's exactly right. The whole reason that Riedel Research is such an expert in China is we have the analysts on the ground in the market covering names that people aren't looking at. There are a lot of U.S.-listed stocks and ADRS that are very poorly understood because people are trying to comment on them from New York or from somewhere else. By being on the ground our Riedel Research analysts really pick up on trends and developments that keep us and our clients well ahead of the game.
Q: This information gap reminds us that Focus Media delayed its earnings release and was subject to some rumors which hurt the stock quite a bit for a few months.
A: Yes, and as you'll recall we stayed very strong on that name because we knew from our contacts on the ground in China that the investigation was going to be completed with nothing negative found. We knew that and other people were operating in a vacuum where they just didn't have the same quality of information that we had.
Q: Earlier you mentioned the Hong Kong market's success. Is a lot of that because China has opened the door for its domestic institutions to invest outside the country?
A: That's right, but it's only opened the door a crack, and there was a concern last night that they were saying that they would have to study that program a little bit more before they expand it to individual investors. So you're quite right that institutions have the right in a limited way to invest around the world, but the real growth opportunity for the Hong Kong market is when mainland individuals are allowed to invest overseas as well. That has not been formalized yet, an some of the comments from the new president yesterday indicated that they would still be doing some other studying of the implications of that before they implement it fully. I completely believe that that will take place longer term and patient investors are going to be very well rewarded as that policy comes into place.
Q: How does that affect the stocks you cover?
A: Many of the names that we cover, including Yanzhou Coal (YZC) and China Mobile (CHL) and a number of other names have dual listings. In many cases they have Hong Kong listing as well as an ADR in the US, so any strength in Hong Kong gets immediately translated into the strength of the ADR in the US. As we continue to see valuations on Chinese growth rise, no matter where it trades around the world, whether that's New York or Hong Kong or Shanghai, it tends to raise the valuations on other China plays around the world. So it's kind of a rising tide lifts all boats theory in terms of how U.S.-listed Chinese names benefit from those strong trends in Hong Kong and China.
Q: This volatile market has seen a battle between credit concerns in the U.S. and robust growth overseas. What do you see the outcome in the next months as it concerns China stocks?
A: I think given the tremendous pace of Chinese growth, domestic issues in China completely overwhelm the role of any issues about the U.S. economy in the near term. In the medium term we have to make sure that major exporting countries like China who find a lot of consumers in the U.S. for their toys and plasma screen TVs and other products they manufacture there don't pullback too much on their consumption. But you see the U.S. consumer starting to pull back, and that can have a medium-term effect on China. Longer term once again I think domestic Chinese issues really come to the fore and you're back to demographics, strong economic growth and strong consumer growth, which make China very attractive. I would use any opportunity during the upcoming year of weakness to increase my exposure to China for the longer-term.
Q: What industries are you looking at most closely at the moment?
A: Telecom has been a great area for us, and we've got two very particular picks in telecom that are undervalued and have not performed as well as the market. But we have some detailed analysis on why we see their margins expanding in the next 18 months which really helps to deliver a lot to the bottom line. We're talking about massive companies in terms of their top line revenue, and as more of that gets to the bottom line it's a tremendous opportunity for investors. I'll just say that we think telecom offers a great opportunity and we're going to highlight a couple of those to our subscribers in the next issue.
Q: Any parting shots?
A: I would just say that if there's any volatility I would use it to increase my exposure to China. There are going to periods of uncertainty here, but the one thing we can be sure of is that China is going to be a strong economic player in the years to come and provides a lot of investment opportunity. I think people need to recognize that China deserves a place in your portfolio. You can't afford to not have China in there, and I think that if you sensibly analyze higher quality names like the ones we cover in our newsletter, you're going to uncover a lot of good profitable opportunities.
