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Bullish on China: Macro views and IPO’s

|Includes: CCSC, CXDC, DQ, GAGA, GEDU, Kandi Technologies Group, Inc. (KNDI), MCOX, MY, PACT, TAL, XUE

 

If you are looking for a wild ride with the chance for sizable returns, look no further than the slate of recent Chinese IPO’s that went public in the last several months.  I’ve personally picked up about half of the 20 or so “ChineseHybrid” stocks—those stocks that operate primarily in China but trade on the Nasdaq or DOW. I’m very bullish on China in general but especially so for any company that caters to the rising middle class.  After the giddiness from QE2 wears off (if it has not already) stocks will stagnate in the US for the foreseeable future until we address the systemic problems that plague the US economy (there are several sectors of the US economy that are an exception to this).

Over the next 1-2 years, China will outperform the US by a wide margin.   I will outline just three of the many systemic problems that haunt the US.  These problems will detract from US growth and further China’s competitive advantage over the US.

First, wages are too high in the US.   Because of incredibly strong unions and laws to support them, workers are able to organize and strike to demand higher wages and better working conditions.  Unions have been far less successful with this in China as the government cracks down with an iron fist and quells labor disruptions.  Therefore, in China they have an efficient, cheap and highly motivated work force (albeit at the cost of human rights, etc but we easily brush those aside in the pursuit of higher yields);  whereas in the US we have lazy, over paid and highly organized (and therefore ready to strike) workforce.   Until American’s are willing to work for Chinese-like wages, or implement isolationist policies, we will have a hard time competing.   

Second, health care costs will prove to be the ruin of America.  There are only so many tests you can do and drugs you can take- except for American’s.   The US spends more, per captia, on health care than any other nation—$6,000 per person, per year—with the government picking up a good portion of that through emergency care of the  uninsured or Medicare.  In China, health care is simply cheaper at all levels and won’t put a strain on the budget in the foreseeable future.   On the other hand, the US will need to find money somewhere- perhaps at the cost of growth- to pay for the exorbitant and ever increasing health care costs.

Lastly, and this is a complicated one, American workers are bad. As I’ve mentioned, unions allow workers in the US to demand higher wages and as a result we have an average $55,000/year income where as the Chinese only have an average income of $6,600/year.   The problem with this is that US workers aren’t any smarter, productive or more efficient than their Chinese counterparts.  Chinese people are willing to work much harder than American’s.  Many reports suggest that American’s are becoming less and less productive as there are ever more distractions to resist- Facebook, Twitter and whatever the next soul-sucking “social” media is.

There are hundreds of other reasons why China will outperform the US over the next decade (which I hope to write about in future articles) but it’s clear to me- China is where you want you’re money.  So how best to cash in?   The answer is HybridChinese IPO’s.  Any IPO will benefit from the general prosperity of the whole country and if it’s not obvious already, I’m optimistic about the future of China. But we can achieve even higher yields if we find companies that cater to the rapidly growing middle class in China.   IPO’s are a great way to gain exposure to this at a discounted price. 

However, be warned, IPOs are risky.  And Chinese IPOs are more risky yet.  There’s already been several  cases this year of funny accounting relating to Chinese IPO’s and I’m sure there will be more in the future.  However, I’m confident that these scummy practices will be the exception, not the rule.  The only thing I can assure you is that there will be volatility.  On the IPO date, it’s not rare to see the first share trade 50-60% above the IPO price.  And after that, I’ve seen some continue running (HSFT) while other’s tanked and are trading at below the IPO price (NASDAQ:GEDU).   The stocks frequently trade up or down 5-15% on a daily basis. With this kind of volatility, it’s important to remember that we are in it for the long term- have at least a one year time frame and hopefully allow more like 2-5 years to see these stocks reach their full potential.                 

We are investing in these IPO’s because we are bullish on China in the long run.  China has a competitive advantage in nearly any industry because of their cheap labor force and equally cheap commodities.  And as more poor people move into the middle class and for the first time ever, have disposable income, consumption will rise yet more and growth will continue unabated at 9-11%. 

 For now, I will only list the ChineseHybrid’s that I’m invested in as I naturally think they are the crème of the crop.  I’m hoping to publish more in-depth analysis in the future. 

Ticker

Company Name

Description

KNDI

KANDI TECHNOLOGIES CORP

Niche electric vehicles and batteries

CCSC

COUNTRY STYLE COOKING RESTAURANT CHAIN COMPANY LTD ADR

Fast food restaurant chain

XRS

Tal Education Group

Education and tutoring

CXDC

CHINA XD PLASTICS COMPANY LTD

Plastics mainly for use in autos

DQ

DAQO NEW ENERGY CORP SPONS ADR

Manufactures silicon for use in solar power equipment

GAGA

LE GAGA HLDGS LTD SPON ADR

Vegetable producer

GEDU

GLOBAL ED & TECH GRP INC

Education and tutoring

HSFT

HISOFT TECHNOLOGY INTERNATIONAL LTD SPONSORED ADR

Provides outsourced IT

MCOX

MECOX LANE LTD SPON ADR

Online woman's apperal

MY

China Ming Yang Wind Power Group Limited

Wind power

XUE

Xueda Education Group

Tutoring

 

 



Disclosure: Long KNDI, CCSC, XRS, CXDC, DQ, GAGA, GEDU, HSFT,MCOX, MY, XUE