Now that I live in China, I have been spending some time exploring the Chinese market segments for the highest long-term growth potential based upon their strong and growing middle class. As a result of this research, I have found my top 3 sectors to be travel, retail, and the financials.
China's middle class currently consists over 300,000,000 people, which is roughly the size of the U.S. population. Over the next generation this figure is expected to double as China focuses more on the innovation and the education of its citizens and less on low cost manufacturing and industrialization. So what does this mean for the companies in these three segments? Simply put, the opportunity of a lifetime.
Vacations are a luxury not all of us can afford. China's growing middle class however is starting to see more and more of these types of opportunities. Ctrip.com (CTRP) is a major player in this travel segment and carries a brand that is recognized all throughout Asia. For those who are not familiar with CTRP, it was established in 1999 and it is the leading consolidator of hotel accommodations and airlines tickets in China. It is very similar to that of Priceline (PCLN) in the U.S. As a result of its notoriety and brand recognition, I believe it to be the best positioned opportunity to capitalize on leisure growth in the upcoming years. Currently, its market cap is $2.62 billion and it trades within the 52 week range of $12.36-$28.12. It most recently closed at $18.20 with a P/E ratio of 22.75. To put this into perspective, U.S. based Priceline.com currently trades at $659.10 a share with a market cap of $32.87 billion and a P/E ratio of 24.88. In the long term, I see equally significant growth for this company making it a key investment for any IRA or long-term hold.
In addition to travel, the retail sector has exploded to its highest level ever. Luxury brands such as Louis Vuitton and Coach are even thriving in a marketplace notorious for poor quality and knockoffs. The question in this segment is not whether to invest but rather which opportunity will reward you the most for your investment. Right now most of these world recognized brands can be found in all of the major cities throughout China, including Shanghai, Beijing, and Hong Kong. The rest of China, however, still remains relatively fragmented without convenient access to such merchandise. Consequently, I believe the best investment opportunity here lies not with the individual retailers, but with the e-commerce sites responsible for distributing these products. The top 2 performers currently in China are Taobao.com and 360buy.com. These two companies carry over 80% of the volume and maintain the highest potential for being the next Amazon in a market segment whose population dwarfs that of the United States. Unfortunately, 360buy.com is still a private company and Taobao.com is owned by parent company Alibaba Group which has yet to complete a U.S. IPO. Nevertheless, several sources have indicated possible IPOs for both companies over the next year or so.
The last segment which begs a closer look is that of the financials. As income and discretionary spending increase, I have found the financials to be a complementary segment. Bank deposits, credit card expenditure, and insurance have all been rising in popularity to meet the demand of China's educated and motivated youth. As a result, I believe credit companies like AMEX and China's Unionpay will see massive growth in this sector over the next 10 years. In addition, banking institutions have grown dramatically in number, over flooding the market with competition as they attempt to reap the corresponding benefits. Nevertheless, I still believe that banks like ICBC, Bank of China, China Construction Bank (CICHF) and Citigroup (C) have all established themselves as the eventual leaders in this segment.
Lastly, we must examine the growing demand for insurance in a country just now becoming familiar with its concept. As its popularity reaches new heights, I believe that China Life Insurance Co, Ltd. (LFC) is your best bet as the well-positioned leader in the industry. The company currently holds a market cap of $22.67 billion and has a P/E multiple of 9.50. Comparably, MetLife (MET) holds a market cap of $35.88 billion and trades at a P/E multiple of 15.66. Over the next 10 years, this company will surpass these figures by two-fold.
So in closing, I encourage you to do some more research into these recommendations and come up with some thoughts of your own, but I do believe China is an opportunity that must not be overlooked for any long-term portfolio that is serious about capitalizing on the best opportunities that lie ahead over the next 10 years.