5 Ways To Invest Into The Chinese Consumer

by: Kevin Quon

China's economy is thriving. To neglect the Chinese market in a portfolio is to shut off the fact that the world is becoming ever more global - that economic growth is developing much quicker and with much more consistency in the world beyond American borders. With such a robust economic expansion underway in China, one of the largest demographics for an investor to consider rests on the shoulders of the Chinese consumer.

With a generation of Chinese workers moving from the village to the cities for pursuit of a better life, one of the growing trends has been the steady increase in domestic consumption by Chinese citizens. Credit card balances rose more than 17% in 2009, and it was estimated that roughly 75% of all urban households had traded up in at least one product category. As the population begins to develop a budding middle class, increased consumption becomes target market worthy of attention. The following investments each offer a unique approach to tapping into the steady growth of this market:

  1. Advertising. As the Chinese domestic market largely migrates into the crosshairs
    of businesses, securing the avenues of reaching out to the public becomes an essential part of the growth story. Investing in a company like Focus Media Holding (FMCN) offers access into a large network of digital media displays dedicated towards addressing the consumer population. Having recently initiated a dividend policy, the $3.17 billion company maintains a forward price-to-earnings ratio of 8.71 and retains a promising operating margin of 30.74%.
  2. Retail Stores. Large multinational corporations like Wal-Mart (WMT), Ikea, and Home Depot (HD) have had mixed success in China. Many of the preconceptions of the market were easily dismissed. Despite wanting to be associated with the Chinese love for cheap bargains, Walmart is actually considered as a higher end brand than local retailer Wumart. In the same sense, Home Depot struggled to appeal to the local taste due to a lack of a "do-it-yourself" mentality in a country abundant with cheap labor. Investors may ironically find that a greater future lies in local retail chains such as Wumart (OTCPK:WUMSF) and Gome (OTC:GMELF).
  3. Consumer Products. Products that represent class and status such as those sold by Coach (COH) and Tiffany & Co (TIF) have been well received by a demographic with such social mobility. Yet a growing amount of products that make life more convenient have been the more ideal way to play the consumer products approach. This is what allows for a company like Deer Consumer Products (DEER), who's stock jumped north of 50% on Thursday due to increased earnings guidance, to grow so rapidly. As the manufacturer of small home and kitchen appliances, the Chinese company provides fundamental home goods like blenders and food processors that make life more convenient and enjoyable for an urbanizing population.
  4. Food. Increased consumption for foods of convenience have been a growing trend for the Chinese consumer. Yum! Brands (YUM) was among the first multinational corporations to penetrate the Chinese market through its chains of KFC, Pizza Hut, and Taco Bell. Yet despite playing catch up having missed out on many of the prime locations, McDonald's (MCD) has made large strides in establishing fortified presence in China. Nevertheless, economic wealth allows for increased variety in choice, and many of the local tastes such as the seafood products offered by China Marine Food Group (CMFO) and the snack foods of American Lorain (ALN) will continue to appeal to the native demographic.
  5. Sector ETF. For many investors, one of the more simplistic means of exposure to the target demographic will ultimately come from managed funds that attempt to capture a broad picture of the market in a single investment. An ETF such as Global X China Consumer ETF (CHIQ) can offer such simplicity. The fund invests primarily in Chinese holdings native to the country with a strong emphasis on the sectors of Retail, Consumer Services, Food, Personal & Household Goods, and Automobiles. With only 40 holdings, the top 10 companies combine for a rough 50% of the investments' worth.

Disclosure: I am long ALN, CMFO, DEER.

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