By Panos Mourdoukoutas
With the Chinese economy growing by leaps and bounds, China has become the new frontier where American investors can harvest higher returns than home. Reaching to the promised land, however, isn’t without risks that depend on the medium of investment. Here we list three different investing strategies:
1. Buy larger Chinese companies listed in US exchanges, such as China Mobile (NYSE:CHL), China Life (NYSE:LFC) Petro China (NYSE:PTR), and China Petroleum (NYSE:SNP), Bidu Inc. (NASDAQ:BIDU), and Sina Corporation (NASDAQ:SINA) — a moderate risk strategy. One problem with these companies, however, is that they did have a substantial run up. Petro China has risen seven-fold since listing, while China Petroleum and China Life rose five-fold.
The second problem is that some of these companies are former State-Owned Enterprises, whereby the government maintains controlling interest and appoints their boards and management. This means that these companies are “units” that promote the interests of government bureaucrats, rather than true enterprises enhancing stockholder value. But even private companies aren’t truly private, as frequent changes in rules and regulations undermine their ability to conduct business and maintain profitability.
The third problem is corporate accounting. Chinese accounting rules aren’t as strict as in the US. This means that usual valuation metrics, such as PE, may not be credible. That’s why it is better for investors to purchase an ETF like FXI rather than individual companies.
Large Chinese Enterprises Listed in US Exchanges
Company Recent Price Listed Price PE Market Capitalization
Petro China $143.20 $20 11.94 $265B
China Petroleum 99.67 20 7.38 86B
China Life 52.47 12 20.45 99.56B
China Mobile 45.55 8 10 183B
Bidu Inc. 134.73 12 74.32 47B
Sina Corp. 118.15 20 -- 7.44B
2. Buy smaller Chinese companies listed in US exchanges like China Electric Motor (OTCPK:CELM), China Agritech (OTCPK:CAGC), China Natural Gas (OTC:CHNG), AgFeed (OTC:FEED), Origin Agritech (NASDAQ:SEED), and E-Commerce China (NYSE:DANG) — a high risk strategy. As is the case with larger Chinese companies, smaller Chinese companies are subject to frequent changes in rules and regulations that undermine their ability to stay in business and maintain profitability. Besides, smaller Chinese companies are frequent subjects of controversy, followed by erratic performance of their stock that may result in substantial losses even for investors who purchased the stocks at the initial listed price.
Small Chinese Enterprises Listed in US Exchanges
Company Recent Price Listed Price PE Market Cap
China Electric Motor $2.91 4.45 4.23 64M
China Agritech 2.95 1.52 8 61M
China Natural Gas 4.19 .87 5.74 89M
AgFeed 1.24 3 -- 72
Origin Agritech 6.18 4.75 25.33 144M
E-Commerce China19.50 29.91 -- --
3. Buy US companies with a large presence in China like YUM Brands (NYSE:YUM), McDonald’s (NYSE:MCD) P&G (NYSE:PG), Caterpillar (NYSE:CAT), Coca-Cola (NYSE:KO) and GE — a low risk strategy. Yum Brands, for instance, derives most of its revenues from China, operating 651 Pizza Hut restaurants in 130 Chinese cities and 3,300 KFC restaurants in 700 cities. McDonald’s operates 1,300 restaurants. P&G and Coca-Cola are major players in China’s emerging consumer market; Caterpillar a major player in the booming construction and mining sectors; and GE a major player in several segments, from infrastructure to energy and transportation. Besides, investing in a large American company, investors do not have to be concerned about accounting issues.
Disclosure: I am long GE.