Why I'm Still Bullish on U.S. Listed China Food Stocks

Includes: ALN, CMFO, PGJ
by: Dutch Trader

Investors still seem to be drugged by recent developments in the China space.

A dozen of US-listed Chinese companies have been accused of accounting fraud and the Securities and Exchange Commission is investigating the possibility that these incidents are part of a larger trend.

Short sellers, auditors and some major exchanges (Nasdaq) have done their part and have left a lot of investors with empty hands. Empty hands because stocks that are halted cannot be traded. In my opinion, it is a shame that Nasdaq takes that kind of measures, because investors are not protected if they cannot trade their way out of misery. But I guess that's another discussion.

The cleansing process in the US-listed China space is already going on for a while now, but as an investor you have the obligation to add future alpha to your portfolio. One way to outperform the market is to look for sectors/markets that are out of favor. The (US-listed) China space is one of these markets and it offers great opportunities of the coming years.

Despite the panic in the market, I think investors can still get on the bandwagon for the next bull market in US-listed Chinese stocks. I am still a big believer in food stocks, despite the recent food sector scandals.

Chinese authorities will take unprecedented efforts to rectify the much-criticized food sector to prevent food safety scandals from further harming public confidence in China's food producers. The Chinese government will continue to overhaul the food sector, particularly concentrating on dairy products, cooking oil, health foods, meat and alcohol this year.

The three major factors that will continue to contribute to the growth of the food sector in China are:

  1. Rapid urbanization and increasing disposable income
  2. A bigger middle-class and an improving social security system
  3. Supportive government policies to boost internal consumptionRapid urbanization

Due to huge differences in consumption ability between urban and rural populations, urbanization shall lead to a fundamental change in China's consumption volume and types.

Increasing disposable income

According to the National Statistics Bureau Report, the annual average growth rate of China's urban disposable income per capita is 13%. A majority of economists believe this rate will be above 12% for the next 5-10 years. Increasing disposable income is beneficial to strenghten marginal consumption and increase the consumption of non-daily necessities and luxury products.


Middle Class Growth

In the past, I have devoted two articles about US-listed Chinese food companies American Lorain (NYSEMKT:ALN) and China Marine Food (NYSEMKT:CMFO). Both companies are no one trick ponies. Of course, both companies are not as sexy as the Chinese dot com stocks, but they have enough potential to be interesting candidates in the expanding food sector.

For investors that are not familiar with the company. American Lorain is an international processed snackfoods, convenience foods, and frozen foods company based in China. They are the largest manufacturer of processed chestnut products in China. On May 3, the company announced that they are launching a new line of frozen rice products under the Lorain® brand name, further expanding their instant rice productline.

The second company China Marine Food produces and sells dried seafood snack foods, trades fresh marine catch and sells algae-based beverages. Their Q1 results were above expectations and strong demand for their 'Hi-Power' beverages" will lead to strong organic sales growth.

Despite the bright future for both food stocks, the companies are priced at bankruptcy levels with P/Es below 5.

Both companies are, of course, two examples of promising US-listed China stocks.

For investors that want to avoid individual company risk, I would recommended the PowerShares Golden Dragon Halter USX China Portfolio (NYSE Arca:PGJ).

This ETF is based on the Halter USX China Index (NYSE Arca: HXC or ^HXC). The concept behind the ETF and the underlying Index is to offer investors exposure to US-listed China stocks. For a company to be included in the Index and ETF it must have an average market capitalization of more than $50 million for the preceding 40 days, trade on the NYSE, Nasdaq or NYSE Arca and must be approved by the Selection Committee of Halter Financial Group.

Disclosure: I am long ALN.