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China Stocks

Secular growth, Mindray, New Oriental

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I was looking for a secular growth stock in China. By secular growth I mean the business grows continously without the normal business cycle. One benifit of secular growth is it usually does not go up or down a lot as economy cycle does. A side benifit of this is we (investors) can sleep better in the night 🙂

The opposite of “secular” is “cyclical”. For example, we normal think the following industries are “cyclical”:

1) Oil, metals and other commodities;

2) Real estate (we have seen the downturn in the US housing market lately);

3) Automobile makers (I don’t know why but I did see the US auto makers got into financial trouble once a while). For the moment Chinese auto makers (mostly joint ventures between China and foreign brands) are enjoying the boom, and it seems the boom will last for a while;

4) The financials, the mortgage companies, the retail banks and investor banks and the private equities (e.g. Blackstone). The reason they are cyclincals is that they dependent on the “cost of the money”, i.e., interest rate. History has told us that the interest rate is not constant;

5) Insurance companies (China Life, Ping’an), the recent growth mostly are from investment gains, future growth will depend on continuing boom of Chinese stock market.

OK, I’ve talked enough about “what’s not”, let me hot the topic, what are the secular growth companies? A good example is Coca Cola, people drink coke in good times and bad, it does not matter whether they have lots of money or they lose their jobs; in the US people drink coke 50 years ago, and it looks like they are going to drink it 50 years from now. But usually people stopped here when analyzing Buffett’s investing in Coca Cola. One thing people forget to look is: Coca Cola is deriving much more revenue from international market compared to 30 years ago (when Buffett bought the Coke). In other words, the growth in last 30 years is mostly from international market. Keep that in mind when we look at the Chinese stocks.

Two of my favorite Chinese companies: China Merchants Bank (600036) and Vanke, very well managed companies, but they are cyclicals. So are Bao Steel, Shanghai Auto, and Citic Securities (600030). Guizhou Moutai (600519) is not cyclical, but it has difficulty to grow: they can not increase the production; it’s consumed mostly in the mid and western part of the China, not the more developed coastal area (in those areas people drink foreign brand liquors).

I also looked at a few media companies, such 600037 (Gehua Cable), 600088 (CCTV), 600825 (Xinhua Media), 600832 (Oriental Pearl). These are mostly traditional media companies: cable, TV, book, newpaper, magazine, etc. Although many people (include Buffett) give up on the growth of tradtional media in the US, I think it’s too earlier to give up them in China. The reason is simple: there are so many cars and houses produced in China these days, and they need to be marketed to the right people. If you look at the Chinese magazine or newspaper these days, I bet half of that are about cars and houses. And luxury goods, consumer goods, trends, fashion, travel (especially international travel), all these need to be marketed to the end consumers. Can Internet (Baidu, Sina) and LCDs (Focus Media) do it alone? I don’t think so.

Consumer products and media/advertisement) are NOT the only growth areas in China. I believe education and health care will also have bright future. Two of the leaders are New Orential (EDU) and Mindray (MR). One serve the “English hungry” Chinese citizens; the other makes medical devices for both domestic and foreign customers. Incidently they did IPO in NYSE a year ago, in Sept 7 and 26 respectively.

Their financial performance (more than 100% gain) is amazing. More importantly, I think is they represent a new type of Chinese enterprises: a humble beginning, saw the oppertunities in the market (a big dream), provide service or products the customers want (realize dream),…this is different from the growth of some state owned companies (monopoly), or some companies got rich over night (online games etc.) without providing real value to customers (sorry I’m not a gamer).

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