Select Chinese Stocks Have a Way to Go

The last few months I have been pretty happy. First off, Consulting Magazine recently named me one of the “Top 30 Consultants Worldwide Under the Age of 30”. While it is always nice to be recognized by one’s peers, the award is more about the quality of our team than me personally since our research is not the result of one person.

Secondly, I have been extremely happy with the way Chinese stocks have dropped in the US over the last few months. For me, there is too much fear on Wall Street about the valuations of some Chinese companies like Sina (SINA) or Netease (NTES). As I wrote a few months ago, putting money into Chinese companies that target China’s emerging middle class like New Oriental (EDU) or Baidu (BIDU) is a smart strategy since most Chinese consumers – especially young ones -- are optimistic and will continue spending despite a downturn in the American economy since they basically spend all of their salaries and have no exposure to the stock market. Unlike during the tech boom, many Chinese companies have real numbers and will continue to boom. Combined with the appreciating RMB, allocating some money towards China is a smart idea.

Thus, with the downturn in America and the subsequent drop of Chinese stocks, I have been happily adding to my holdings of Chinese stocks while getting out of American ones as quickly as possible. I am still fearful of a dropping American economy and think that the sub-prime mess will still linger for a while. I would like to buy more financial services stocks like a Citigroup (C) but am scared because I just cannot figure out the exposure issues. I am incredibly risk averse, so I have been unloading my shares in US stocks.

Some people have asked me what my investment strategy has been over the last few months, so I thought I would write down a little more in-depth about what I am doing personally.

Well, I have been buying a lot of Australian dollars for a while now, though I think the greenback might go up (finally!) by the end of the year.

My personal investing strategy when it comes to equities is not something I would recommend to the everyday retail investor. I can stomach what others call risk and volatility because I rely on research that my own team and I conduct.

I have never been one to understand diversification. I have always felt that it is better to find 10-15 stocks and put money into them rather than put money into huge baskets. I do not believe that the markets are perfect and anyone who says that they are is an idiot. There is too much mis-information, rumor, lack of knowledge and psychology at play for there truly to be a perfect market. But eventually the market gets it right to a degree, even if it is for a brief time. So I do research and research and more research, and then I make investment decisions. And then I wait for the market to hit what I am looking for. Sometimes I am a momentum investor, sometimes value. It all depends.

Right now, I only own 5 stocks. This is what I currently have in my portfolio.

1. Ctrip (CTRP) takes up a full 49.5% of my portfolio. I know it sounds crazy to a lot of folks, but we have done research all over the place on this stock and I feel comfortable with having such a huge part of my portfolio in one stock. While it dropped a lot in the past few months, I kept adding to my holdings, which accounts for why so much of my portfolio is in the stock – it was way too cheap. Happily, Ctrip is up 15% so far today since it announced killer numbers last night. It is only going to get better as more Chinese travel. China’s economy continues to hum around 10% and Chinese will spend their money traveling around to Sanya to Kunming on vacation.
2. Focus Media (FMCN) takes up another 21% of my holdings. I still do not like LCD screen advertising much as I do not think it is particularly effective for most sectors, though I do think it is good for the auto sector. But I like Focus because of their expansion into mobile phone and internet advertising. With the fight for the hearts and wallets of Chinese consumers getting more intense, marketing budgets of MNCs like Motorola (MOT) are getting bigger for China. The Chinese consumer now is too important for the bottom-lines of MNCs and Focus Media will benefit.
3. China Mobile (CHL) we estimate that China Mobile will hit 600 million subscribers by the end of the year. I went on a recent trip to the countryside way out in the middle of nowhere, and even the peasants were using China Mobile phones. Though there is some risk with this stock because of the rumors surrounding China Netcom (CN) and China Unicom (CHU) and China Telecom (CHA), I still think it is a good place to have some exposure.
4. My other two holdings are in American stocks. I own Goldman Sachs (GS) and Google (GOOG). This is how I figure it… the smartest guys I know working on Wall Street from a business standpoint are all at Goldman. Same thing goes for the folks working in Silicon Valley. At some point, long-term, these guys are going to make money and the shares are going to go up. I am a little concerned at how far Google has dropped lately and might exit my holdings in them because I am not sure how fast it will go up. But these are good long-term plays. As many of you know, I am a believer in backing good management teams over killer ideas because, in the long-term, the good management teams will figure out how to make sustainable money.

So my strategy is unconventional and not for the faint of heart. I would not recommend this for most retail investors. But I still think that Chinese stocks have a way to go up if you can handle the volatility.

Comments

[Bharat]

Excellent article. Thanks for candidly sharing your portfolio.
I sold all my holdings in U.S. stocks in Mid January. Sat on cash for a few weeks and recently bought Indian ETF's and closed end funds INP, IIF, IFN and Chinese FXI, Gao, PGJ. Roughly 50/50 for India Vs. China.
I am up significantly in last two weeks, though INP where I had made good money in 2007 has been a laggard lately due to law changes in India.
Please comment.

[e chang]

I have 3 of the 5 stocks you own (FMCN, CTRP, GOOG), and only recently dumped GS, possibly to buy back sometime down the road. I also like CHL. Nevertheless, I think your lack of at least a modicum of diversification will burn you. How long have you been investing in stocks? The "smartest guys in Silicon Valley" also started many of the internet companies that crashed in the tech bubble. CTRP is expensive.

[lanaar2]

Hey,

About your CTRP pick, might I suggest you take a look at a stock called Universal Travel Group (UTVG.OB). It is one of CTRP's competitors. ''China OTC Player'' talks about it a lot on SeekingAlpha, it trades at a discount to CTRP and has monster growth. The reason it's mostly unheard of is because it trades on the OTC board, but the company intends to switch to a bigger board. If you want to learn more about it, and wish to discuss it, I can suggest a site called investorvillage.com, UTVG has it's own message board where shareholders discuss it, value it, compare it, etc.

[fAT]

Google had some sort of really terrible news today; it had to do with some company they're working with, not being compatible with I don't know what, I 'm not sure , some sort of real junky stuff...

As far as China, like India, it's up God knows how much over the past couple years. Given the current credit conditions worldwide, it's a matter of time before the markets over there have a severe correction too. At the rate the HS loses points, which is often 2 or 3 or even 4 percent on any given day, a big news story could send the Asian markets tumbling.
Not to squeeze you too tight with my strong frame, but it's happenned before in the not-too-distant past and it's bound to happen again int he not-too-distant future.
Our dollar may be in a very low place, but it's given Asian markets a HUGE boost. Also, US and foreign investment in Asia has also seen those markets grow. If too many investors start pulling out for one reason or another, it's going to be bad news.
don't forget how notorious banks in China are for their BAD LOANS

[TAS]

It's your money. Good luck.

[BobinJax]

Play China by buying commodity and ag stocks.

[Where ToNow?]

The above stocks you mention have been on a strong downward decline lately, where's the bottom on these stocks? Also, how large is your overall portfolio in USD terms?

[Where ToNow?]

It's frustrating that you do not reply to posts about your article. I have 2.5% of my portfolio in FMCN and it's very frustrating watching the stock plummet. Where do we go now? What have done with your position? Any comments on this or other China stocks in your article would be appreciated.

[Where ToNow?]

Thank you in advance for your advice.