The Warren Buffett of China's Next Move

Includes: BTUUQ, WLT, YZC
by: Investment U

By Carl Delfeld

Move over Li Ka-Shing.

Guo Guangchang, along with three partners, began investing in China in 1992 with a paltry $4,000 grubstake. Their holding company, Fosun International, has since then grown to jackpot of $6.3 billion.

Forbes now estimates Mr. Guo’s stockpile at $2.8 billion. Amazing.

Most of Fosun’s initial investments were in fast-growing Chinese companies in sectors like mining, steel and property. Then it shifted gears with a few investments in service companies like Focus Media (Nasdaq: FMCN). Focus Media is China’s leading digital media group (recommended by the New Frontier Trader last month).

I don’t know about you, but I’m “all ears” to learn about Fosun’s next step.

Here’s a hint – the new focus is not on Chinese companies at all…

Capturing the Emerging Chinese Big Spender

The next target centers on the huge potential of Chinese consumer markets. The strategy is to build partnerships with premier foreign brands that have yet to plunge deep into the middle kingdom.

These firms need help in finding the right marketing message and Chinese partners, not to mention navigating the all-powerful Chinese bureaucracy. “We know China best,” Mr. Guo said. “If a company has a good story but no presence in China, then we would like to help it.”

But don’t Chinese companies have the upper hand over foreign competitors in consumer services like travel, retail, restaurant chains and hotels?

Mr. Guo doesn’t think so…

  • First, many of these markets are very fragmented and Chinese firms have yet to build the strong brands and scale necessary to dominate them.
  • Second, with more than 60 large foreign private equity firms scouring the country for deals, these Chinese companies are priced at a sizable premium.
  • Plus, Chinese equity firms have also piled in. Last year, China’s private equity industry raised $27.6 billion, more than double the amount in 2009, according to data from Zero2IPO, a Beijing-based research firm.

As Ralph Jaeger, a senior research consultant for Cambridge Associates, puts it: “Several years ago, Chinese companies were cheaper. Today you have to go outside China to find companies at a discount.”

So for an equity stake in the parent company, Mr. Guo’s Fosun International helps firms launch their China strategy in a big way.

Here’s one example. In June 2010, Fosun invested in Club Med, the famous French leisure and resort group, with expectations that going forward Club Med expects to grab a hefty share of an annual growth rate of 30 percent in the number of Chinese tourists worldwide. With the advice and support of Fosun, Club Med recently set up a ski village in Yabuli, a resort town in northeast China that’s a haven for fat cat Chinese tourists.

Mr. Guo’s Evolving Strategy for Investing in China’s Growth

What can we learn from Mr. Guo’s evolving strategy for investing in China’s growth?

  • Change is the only constant. Stay flexible and open to changing your approach.
  • Be mindful of valuations. Multinationals around the world offer great value for long-term investors.
  • An indirect strategy is oftentimes smarter than the obvious direct approach.

One example of this last point is how to play the rising price of coal on the back of soaring Chinese demand. The logical choice to play this trend would be Yanzhou Coal Mining (NYSE: YZC), which is a great company but off about eight percent for the last three weeks.

Surprisingly, Yanzhou Coal has been recently surpassed in earnings growth and share price momentum by two American firms:

  • Walter Energy (NYSE: WLT)
  • Peabody Energy (NYSE: BTU)

Walter Energy, one of the world’s largest suppliers of coking coal, posted first-quarter profits that were up by 97 percent. And Peabody is no homebody. It’s on the short list of possible winners in a bid to develop Mongolia’s massive coal project called Tavan Tolgoi.

Remember to always think through what is the best (and lowest risk) play on a growth trend before pulling the trigger. Use your imagination and be creative.

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