In the wake of accounting scandals involving over 25 North America-listed Chinese issuers, many investors question the integrity of Chinese companies. However, investors do not have to invest in Chinese companies to profit from China’s economic growth. Many U.S. companies have a strong presence in China and their China operations are becoming essential growth drivers. Below are six U.S. companies that are well positioned to benefit from China’s economic growth.
YUM! Brands (YUM) has over 4,000 locations in China and the company is the leader in China’s QSR market. The company currently has a market cap of $24B, trades at 20x earnings, and pays a 2.2% dividend yield. YUM reports results from China Division separately from the international division due to China’s strategic significance. YUM achieved success in China because the company modified its menu according to the local preference. On the KFC menu, a customer can find pork congee, milk tea, and even roasted chicken/steak on rice. Similarly, customers can find fried rice, noodles, and bubble tea in China’s Pizza Hut locations. Adaptation has made YUM a clear leader in China’s QSR industry. In 2Q11, China Division’s operating profit grew 25%, compared to YUM Restaurant International (+11%), and U.S. Division (-28%). Same-Store-Sale (SSS) in China grew 18%, compared to YRI’s 2%, and US’s -4%. Finally, 99 out of 241 new units were added in China during the quarter.
Tiffany & Co. (TIF) can capitalize on China’s new rich because its brand features both aspiration and elegance. The company currently has a market cap of $9B, trades at 20x earnings, and pays a 1.7% dividend yield. As Chinese consumers become increasingly sophisticated, Tiffany is the brand that many people prefer because foreign luxury jewelry brand commands higher status symbol than local brands (I personally experienced the affection and desire that many girls in China have on Tiffany when I was there recently, a trend that was nonexistent five years ago). Tiffany plans to open between 25 – 30 stores across major cities in China by 2015, when the country is expected to surpass the U.S. as the largest jewelry market in the world. Last quarter, Tiffany reported a 55% sales growth in the Asia-Pacific region compared to 25% growth in the US, 21% in Japan, and 32% in Europe. Comparable store sales increased 41%, with the largest growth in the Greater China region.
Like Tiffany, Coach (COH) is also well positioned to capitalize on China’s new rich. The company has a market cap of $16B, trades at 19x earnings and pays a 1.7% dividend yield. However, unlike Tiffany, Coach’s entry-level luxury products are affordable to the Chinese middle class consumers from the second and third tier cities. In addition, Coach appeals to the Chinese consumer because it is an American brand. Unlike Louis Vuitton (GM:MAGOF), Gucci (OTC:GUCG), and Chanel, whose products are not shy from flaunting their logos as a status symbol, Coach’s products encompass a combination of being low key, trendy, and of high quality, which greatly appeals to Chinese consumers who prefer practicality over extravagance. As of the most recent quarter, Coach has a total of 66 stores in China, after opening 11 new locations during the quarter.
General Motors’ (GM) history in China dates back to the early 20th century. The company opened its first sales office in Shanghai in 1929 and its customers included China’s last Emperor Pu Yi, Nationalist Revolutionary leader Sun Yat-sen, and Communist Premier Zhou Enlai. GM still enjoys tremendous success in China. For the first eight months of 2011, GM and its China-JV sold 1.65m vehicles in the country, just shy from the 1.69m vehicles sold in the U.S. over the same period. Going forward, GM can compete in both the high-end to low-end segment. In the high-end segment, Cadillac and Buick both command aspiration and brand recognition among sophisticated Chinese car buyers. In the mid and low-end segment, Chevrolet Cruze and Buick Excelle both offer consumers a combination of affordability and utility. Currently, GM has a market cap of $32B and trades at 5x earnings.
IBM’s (IBM) largest client in China is the Chinese government. Over the past several years, IBM sold its PC division to Lenovo, whose biggest shareholder is a government agency called Chinese Academy of Sciences and launched several initiatives with the Ministry of Education and the Ministry of Health. Currently the company is building a top cloud computing base in China and pushing greater adoption of its smarter computing system, software, and services within China’s public and private enterprises, including China National Bureau of Statistics, Guizhou Mobile, and Guizhou Provincial Health Department. Currently, China’s IT infrastructure is very weak and lacks the sophistication that we see here in the developed world. The Chinese government relies on IBM to bring China’s IT infrastructure on par with international standard just as much as IBM relies on the Chinese government for its future growth. IBM’s superior product quality and strong relationship with the government provide the company with a stable growth trajectory. IBM is currently valued at 13x earnings, pays a dividend yield of 1.8%, and has a market cap of $202B.
Nike (NKE) places itself as a high-end sportswear company in China where the company topped $2B in annual sales. Nike’s most popular product line is its footwear in which the design, the sole, and the material are slightly superior to those of domestic rivals such as Li Ning and Dongxiang Group, and allow Nike to charge a premium price on its products. Nike’s deep expertise in product innovation and marketing allow the company to win high-end consumers who aspire to have top quality sportswear. As a result, both Li Ning and Dongxiang are facing headwinds competing against Nike in the high-end market, and are experiencing declining margins, slowing sales, and mounting inventories. In the most recent quarter, Nike’s footwear sales in China grew 28% compared to 12% growth in the North America market. Nike currently has a market cap of $42B, trades at 20x earning, and pays a 1.5% dividend yield.