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Peter Fuhrman
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Chairman, Founder and Chief Executive Officer at China First Capital (www.chinafirstcapital.com) , a China-based international investment bank and advisory firm for capital markets and M&A transactions. China First Capital was established in 2007 and has its headquarters in Shenzhen, China.... More
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  • Good News About China’s Food Price Inflation: Chinese Peasants’ Time of Unprecedented Plenty
     Food prices in China, as everyone inside and outside the country now knows, are rising fast, in some cases by over 30% during 2010. The Chinese government puts some of the blame on speculators who are said to be buying large quantities of fresh food, holding it off the market and then profiting from price increases. There seems to be some evidence of this.

    There’s no short-term fix for these price increases. The Chinese government has released for sale some of its food stocks. It is also urging peasants, and local cadres who govern rural China, to make sure more food is grown next year to increase supplies. The peasants probably won’t need any such encouragement.

    The increases this year in food prices have done more, in a shorter time, to lift income levels for many of China’s 600 million peasants than any other single measure taken over the last 30 years.

    There has never been a  better time, in China’s long agrarian history, to be a peasant. Fundamentally, food price inflation in China represents a colossal transfer of wealth from China’s more affluent urban areas to the rural hinterland where half of China’s population still lives.

    If this lasts, it will narrow the gap in living standards and income levels between China’s cities and countryside. This is one of the overarching goals of the Chinese government. And yet, no one is applauding.

    Instead, the Chinese central government has reacted with some alarm to the recent price increases. It knows that higher food prices are putting the squeeze on city-dwellers, including, of course, those in the capital Beijing and other major cities. In China, communist power originally took hold in the countryside, and a lot of party doctrine still speaks about its roots among the peasantry. But, political power today is firmly rooted in urban areas.  China’s political, economic and cultural elite all live in major cities, as do most of their friends and family. So, price rises effect this group directly.

    When apples, the staple autumn fruit in most of China,  almost double in price, as they have this year, political leaders will soon hear about it. The fact that China’s apple farmers now have a lot more money in their pockets is not necessarily part of the political calculus.

    Yet, it is undeniable that the fastest and most effective way to raise peasant living standards and real incomes is higher farm prices that don’t fuel overall inflation. There are signs that’s now the case, that the only area of significant double-digit inflation is in food prices. If so, this is unquestionably the best time in Chinese history to be tilling the land.

    How long will this last? Of course, commonly, a spike in food prices leads to overall price levels rising as well. This can erode, or even wipe out,  the rise in income for farmers from higher food prices. Also, today’s high prices will certainly lead to more land being cultivated next year, as farmers chase the fat profits from today’s prices.

    I was just in Jiangsu Province, in central China, and it seemed like most of the farmland is under plastic cover this winter, allowing peasants to keep growing and selling vegetables. Supply goes up, price comes down. Eventually.

    How high are food prices at present? Looking around my local covered market, prices in the stalls for many fruits and vegetables are now as higher or higher than prices commonly seen in the US. Looking just at autumn fruit, apples are about $1 a pound; navel oranges around 60 cents; clementines about $1 a pound; bananas are 50 cents a pound. Meat prices have risen sharply.

    Pork remains comparatively cheap at about $2 a pound, but chicken is quite a bit higher here. Garlic and ginger, the two fundamental staples of all Chinese cooking, are both at all-time highs of around $1 a pound.

    So far, in my experience, higher food prices haven’t yet fed through to higher prices at restaurants, noodle shops or even the outdoor steamer wagon where I buy corn-on-the-cob and potatoes as snacks. This means restaurant margins must be hurting. One notable exception, McDonalds in China. They recently announced price increases to counter effect of rising raw material costs.  With about 900 restaurants in China, all in larger cities, McDonalds feeds a lot of people.

    Wages are also rising very steeply in urban China, as is household wealth for anyone who owns property. This seems to be allowing most urban Chinese to absorb higher food costs without much of a fuss.

    In other words, just about everyone across this country of 1.4 billion is doing much better, year by year. For now, the 600 million peasants are doing best of all. Viewed across the breadth of China’s long history, no less than across the last 30 years of unparalleled economic progress, this is a singularly welcome development.

    .



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 14 7:32 PM | Link | Comment!
  • Chinese IPOs -- New Research on Where and How Chinese Entrepreneurs Go Public
     For Chinese entrepreneurs, there has never been a better time to become a publicly-traded company.  China’s Shenzhen Stock Exchange is now the world’s largest and most active IPO market in the world. Chinese companies are also active raising billions of dollars of IPO capital abroad, in Hong Kong and New York.

    The main question successful Chinese entrepreneurs face is not whether to IPO, but where.

    To help entrepreneurs make that decision, CFC has just completed a research study and published its latest Chinese language research report. The report, titled “民营企业如何选择境内上市还是境外上市” (” Offshore or Domestic IPO – Assessing Choices for Chinese SME”)analyzes advantages and disadvantages for Chinese SME  of IPO in China, Hong Kong, USA as well as smaller markets like Singapore and Korea.

    The report can be downloaded from the Research Reports section of the CFC website , or by clicking here:  CFC’s IPO Difference Report (民营企业如何选择境内上市还是境外上市)

    We want the report to help make the IPO decision-making process more fact-based, more successful for entrepreneurs. According to the report, there are three key differences between a domestic or offshore IPO. They are:

    1. Valuation, p/e multiples
    2. IPO approval process – cost and timing of planning an IPO
    3. Accounting and tax rules

    At first glance, most Chinese SME bosses will think a domestic IPO on the Shanghai or Shenzhen Stock Exchanges is always the wiser choice, because p/e multiples at IPO in China are generally at least twice the level in Hong Kong or US. But, this valuation differential can often be more apparent than real. Hong Kong and US IPOs are valued on a forward p/e basis. Domestic Chinese IPOs are valued on trailing year’s earnings. For a fast-growing Chinese company, getting 22X this year’s earnings in Hong Kong can yield more money for the company than a domestic IPO t 40X p/e, using last year’s earnings.

    Chasing valuations is never a good idea. Stock market p/e ratios change frequently. The gap between domestic Chinese IPOs and Hong Kong and US ones has been narrowing for most of this year. Regulations are also continuously changing. As of now, it’s still difficult, if not impossible, for a domestically-listed Chinese company to do a secondary offering. You only get one bite of the capital-raising apple. In Hong Kong and US markets, a company can raise additional capital, or issue convertible debt, after an IPO.  This factor needs to be kept very much in mind by any Chinese company that will continue to need capital even after a successful domestic IPO.

    We see companies like this frequently. They are growing so quickly in China’s buoyant domestic market that even a domestic IPO and future retained earnings may not provide all the expansion capital they will need.

    Another key difference: it can take three years or more for many Chinese companies to complete the approval process for a domestic IPO. Will the +70X p/e  multiples now available on Shenzhen’s ChiNext market still be around then? It’s impossible to predict. Our advice to Chinese entrepreneurs is make the decision on where to IPO by evaluating more fundamental strengths and weaknesses of China’s domestic capital markets and those abroad, including differences in investor behavior, disclosure rules, legal liability.

    China’s stock market is driven by individual investors. Volatility tends to be higher than in Hong Kong and the US, where most shares are owned by institutions.

    One factor that is equally important for either domestic or offshore IPO: an SME will have a better chance of a successful IPO if it has private equity investment before its IPO. The transition to a publicly-listed company is complex, with significant risks. A PE investor can help guide an SME through this process, lowering the risks and costs in an IPO.

    As the report emphasizes, an IPO is a financing method, not a goal by itself. An IPO will usually be the lowest-cost way for a private business to raise capital for expansion.  Entrepreneurs need to be smart about how to use capital markets most efficiently, for the purposes of building a bigger and better company.


    .



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 07 9:55 AM | Link | Comment!
  • The New York Times on China – Often Wrong, Seldom in Doubt

    The impetus for writing the last blog post was reading this in a New York Times article on China:  “Most people in China can only dream of being able to afford an expensive phone. But millions of Chinese are developing a taste for luxury goods, and Apple products have joined Louis Vuitton bags as totems of wealth.”

    The comment was vintage NYT reportage: managing to be both condescending and ill-informed. The reality is otherwise: personal wealth in China is widespread and growing quickly. While not yet at levels seen in Taiwan or Hong Kong, more people in China can afford “an expensive phone” than in the US. The New York Times, however, prefers more often to characterize China today much as it has for the last 30 years – as a largely poor country, with a few selfish and wealthy autocrats lording over a teeming mass of mistreated peasants subsisting on starvation wages.

    Back when I was a reporter, I once heard someone describe another journalist as,  “Often wrong, but never in doubt”. The same, writ large, can be said of The New York Times Its primary activity is one of substantiation, not investigation. It seeks out, or partly imagines, stories that will support its rather simple, binary world view: Democrats good, conservatives bad; UN good, US military action bad; tolerance for its favored groups and causes, good; tolerance for the groups and causes it loathes, bad.

    I don’t get my business news from The New York Times, a habit I first cultivated over 20 years ago when I went to work at Forbes. The times I do read business stories in the NYT they seem to be written by reporters with a disdain and distrust for business. I’ve met a few NYT business reporters over the years. If I had to sum up their basic belief system, it would be “property is theft”.

    As far as China goes, the NYT’s reporting mainly has two dominant flavors: “we don’t like it”, or “we don’t understand it”. Human rights, pollution, Tibet and defective manufactured products figure prominently. China’s remarkable positive transformation, and the huge increases in personal, political and economic freedom, all get short shrift inside the pages of the NYT.

    Of course, there are many and better sources of information about China. The Wall Street Journal, for example, is consistently good. The NYT’s circulation is shrinking year-by-year, as is its influence. But, for a certain group of Americans, particularly on the left and in the more elite precincts of academia and the media, the NYT remains the primary source of information about the world.  So, its reporting about China has outsized consequences,  helping to shape (or deform) elite opinion in the US.

    It will come as news to many of the NYT’s readers that China is on the whole a stable and contented nation. This is, arguably, the most important story of my lifetime, China’s return, after at least a 500-yeaar hiatus, to a place of central importance in the world, as a confident and prosperous nation. The New York Times too often seems the last to know.




    Disclosure: None
    Dec 01 10:08 AM | Link | Comment!
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