Now stranded in Beijing.
I hate you Continental Airlines.
The most interesting things are always said off the record. While you won’t get attribution for these observations from a very opinionated investment banker, I thought they might all be worth talking about. (Note: I don’t agree with all or maybe even any of them)
On Goldman Sachs
They are so short-term now…and hedged long/short. If they are involved in something, it will eventually blow up.
On U.S. companies operating in China
Most are not complying with U.S. law. They are bribing officials and just not telling you. Ask them. Ask them point blank.
On Big 4 auditors
They are destroying Chinese companies by forcing them into non-Chinese financial frameworks. When Chinese companies go public, they are #1 or #2 in their industry. After the big 4 get to them, they are trash. Think about it: If you pay all of your taxes, then you have no money left to pay your bribes. They also have no ethics. Why don’t they ever find problems at big companies like PetroChina? PetroChina is doing many of the same things as the small companies, but it would be bad for business to criticize the Chinese government.
On the Chinese stock market
It is a joke, a game. No companies use it for corporate financing. And there is too much money and not enough stocks. Very overvalued. Why does Geely have a higher multiple than BMW? Geely is trash next to BMW -- worse company, worse brand, worse cars, etc. And BMW probably has more growth in China. As soon as the people buying Geely cars today have enough money, they will buy BMWs.
On the French
French companies do very well in China because they’ve learned all of the Chinese tricks and are happy to use them!
On Chinese A shares
Why has there been fraud in U.S.-listed Chinese stocks, but not in China-listed Chinese stocks. The answer is not that fraud does not exist in China listed stocks. These guys all learned the same things. Rather, the Chinese government is probably being very careful about fines and penalties to maintain stability.
Shanghai SuperBrand Mall (Pudong)
Just got done with one of the many mall walks I do while traveling (I hate the mall in the US, but generally enjoy the experience abroad). Spent about three hours in the SuperBrand mall, which is in Pudong near the Huangpu amid many luxury hotels and tier 1 office properties -- so this is high end consumer stuff. It's also Saturday and it's raining here, so as you might expect the mall was packed -- giving me a pretty good sample size for checking out the appeal of certain brands and stores to China's richest consumers. The mall is also massive -- 10 floors of shopping, restaurants, arcades, and an IMAX movie theater.
Who’s hot and who’s not? Read on to find out…
Happy to say that this current GG recommendation was hitting it out of the park. Uniqlo store on 3F was in a prime spot, packed with customers, and the line to buy was 10 deep the entire time we were in the store, but moving rapidly thanks to very efficient staff. Prices ranged from RMB59 ($10) for T-shirts to a few hundred RMB for dresses and nicer clothes. That said, lots of good deals -- and I even walked out of there with a linen shirt for RMB99 (can't beat that price!).Also happy to say that I dropped by H&M and Zara, which I consider relevant comps, and Uniqlo was blowing them out of the water in terms of traffic and commercial activity. Obviously, it's just one store, but I was a happy shareholder today seeing the success they were having. If this concept can grow rapidly in China, then the stock is a real bargain at present prices.
Toys R Us
Chinese consumers can be notoriously stingy about a lot of things (try to get them to pay for something on the Internet), but when it comes to their (one) child, they are spendthrifts. Toys R Us was packed with threesomes (mom+dad+child) buying everything from puzzles to games to dolls to robots -- robots were very popular. Interestingly did not see any video games, so the concept here is really catering to under-12s.
Din Tai Fung
Food is awesome (great soup dumplings). People were waiting out the door throughout both dinner last night and lunch today (yes, we’ve already eaten there twice). I don’t believe it’s possible to invest in Chinese operations, but Singapore-listed Breadtalk Group has some expansion rights to the concept outside of China. Unfortunately the Breadtalk Group Breadtalk location in the 1F food court was bereft of customers.
Both Pizza Hut and KFC, which here were relatively fancy sit-down places, were mobbed throughout lunch. Pizza Hut was pushing a RMB40 pizza deal.
I’ve looked at this Japanese lingerie company in the past for many of the same reasons I own Fast Retailing -- knowledge of Asian tastes gives it a leg up as it seeks to expand in China. I’ve avoided it thus far because closely-held Triumph is also doing well here, but the activity around the brand today may be reason to revisit it. Of course, the fact that they were hosting a fashion show probably helped in that regard (don’t miss the video).
Not sure why, but was wildly crowded with people buying the shoes.
Inditex and Hennese & Mauritz
Already mentioned it above, but their flagship stores were dead relative to Uniqlo.
Adidas and Nike
Very little interest around the sporting goods brands. Obviously we know the Adidas numbers are doing decently here, but unlike Uniqlo, the branded sportswear was extremely expensive. No price break from what you’re paying in the U.S., which is a stretch even for buyers in Pudong. Might be nice to see Adidas try to do a more local execution at some point with lower-priced goods (maybe they can use Reebok for that?).
These western concepts were also all very quiet on what was otherwise a very packed day at the motel.
You can find the video on our microsite: http://www.fool.com/sites/motleyfoolchinatrip/video/c5bmFqMjqQR0XdkIIpnfR71cJZ4inkw2
And the photos on the microsite or flickr: http://www.flickr.com/photos/tmfglobalgains/sets/72157624171310475
This is the first trip to China for our Foolish colleague Scott Schedler. He's having a great time, but unfortunately due to smog in Beijing and now heavy rain Shanghai, he has to reason to believe that the sun ever shines here. Looking up at the sky yesterday as we were coming home from a meeting, he finally sighed and said that he was "giving up on visibility in China."
Of course, after several meetings in which companies were telling us just how hard it is to do business herre, Sean and I both thought he was talking about something other than the weather.
Thankfully, it's starting to look like the rain may actually clear up:
This is one I heard today that should be stamped on your passport when you enter the country...
"China: Where nothing is allowed, but everything is possible."
Just discovered that Din Tai Fung has a branch 100 yards from our hotel. It's 730am, but I am already looking forward to lunch.
Be jealous: http://www.dintaifung.com.tw/en/index.asp
Some are saying that China is building too much infrastructure to artificially keep up its growth rate. To those people I say why would we have had to wait 20 minutes just to get into the Beijing subway station if we wanted to ride it around rush hour today.
That is all.
On Caixin re: the Alipay dispute:
He sounds idealistic, and as I expected, will go far to protect his reputation.
You may remember that famed UK investor Anthony Bolton launched a China fund a few years back. Well, our friendly Fools in London recently got to hear what he's learned after posting years of (mostly) losses: [more]
Thinking I may have been wrong to be so skeptical of Baidu.com. As many readers will know, my hypothesis has long been that Google left to China to keep brand credibility and therefore could return with verve when China ultimately lifts the Great Firewall (and I am always short totalitarianism). But after spending a day at Baidu today, I think Google may have miscalculated. Baidu, while basic and an imitator compared to Google to some extent, appears to be a very rapid learning organization. And with 86% market share of the Chinese search market, they have lots of search queries to learn from. If Google comes back in 10 years, Baidu will already be so much smarter. Without a tech advantage, what will Google offer?
Finally, and as an aside,it's amazing how much you learn after someone tells you that the next comment is off the record. Sorry I can't say more.
Look for more notes on Baidu in an upcoming dispatch. Hit mot.ly/foolsinchina to sign up to get them. [more]
Haters are going to hate, but our analyst team split up today with Team A touring several Yongye stores in Beijing municipality and meeting farmers using the product while Team B got an in-depth look at CGA's recently acquired Gufeng manufacturing facility. Both impressed.
The MSPEA deal has cleared up at least some of the doubts about Yongye, so there's not much to see here -- and we'll be posting full notes on the GG discussion boards after we digest and discuess.
As for CGA, the big challenge for that company will be pursuing its acquisition capacity seemingly without the ability to raise capital. Since selling equity at this price is out of the question, the company would like to sell bonds to investors with an insurer signing off. That would be a heckuva process, but a huge accomplishment if they can get it done -- accomplising the dual task of getting money and credibility.
Full notes coming on the GG boards as we digest all of the material, and keep tuning into the dispatches. Sign up at mot.ly/foolsinchina [more]
A short post this evening since jetlag is fast gaining on me (though my system of running right after I get off a long-haul flight continues to work wonders).
Quote of the trip is already "Eyes wide open" -- a saying that justifies asking ridiculous questions about the relative risk profiles of Chinese stocks.
Heard from at least two sources that it's ok to have multiple sets of books in China, particularly if you're dodging corporate taxes. If you don't, your business will not be competitive. Word on the street here is that U.S. investors are getting too worked up about mismatched SAIC/SEC filings.
In another moment of China awkwardness, the CFO of a company we're very interested in (withholding name in the name of additional due diligence) said that he couldn't tell me who owned a certain important asset that the company has a contractual relationship with because it could create an awkward public fallout. You'd think people by now would know to get this stuff all out of the way before it comes out in a bad way.
All told, we're off to a strong start. Dispatches start tomorrow (Monday). [more]
If you're in the area, we'll be at the Jade Bar at the Pudong Shangri-La from 5 to 6 p.m. on Saturday, June 18 meeting and hanging out with other Fools. Come join us!
After two years carrying the global economy on its back, China's economy is starting to slow. Auto sales growth slowed dramatically in April, and while China fights to bring inflation under control, it recently allowed electricity rates to rise in response to power producers complaining that high coal prices were limiting their ability to turn a profit as electricity demand grows.
Remember to follow all of our findings starting next week in China: http://mot.ly/foolsinchina [more]
Click on the link below to hear the team preview our upcoming China trip on David Kuo's Monytalk program.
The words "cheap," "Chinese," "Internet," and "stock" don't belong together -- at least not until the current bubble bursts. In the wake of raging returns from Baidu.com, a recent spate of Chinese Internet IPOs has demonstrated beyond a doubt that U.S. investors are willing to pay a pretty penny for a piece of China's Internet growth story. [more]
I got an interesting response from my friend Mekael in Guangzhou to yesterday's column. Here is his food for thought: [more]
It's been a fascinating and volatile time to be investing in Chinese stocks for the past 24 months, but last week showed definitively the challenges and opportunities in the sector. [more]
It was almost five years ago now that our Motley Fool Global Gains research team started visiting China, regularly searching for overlooked investment opportunities in the country. We were attracted to the market for the same reasons every business and investor is attracted to China -- it's the world's fastest-growing economy and will someday be the largest as well. Furthermore, because of infrastructure development, rising consumer purchasing power, increasing demand for food and energy, and a growing need for higher quality health care, there's not an industry in the world that can look at China and not see the potential for a growth bonanza. [more]
I’d be lying if I said there wasn’t at least one moment this year when I wondered if our annual research trips to China are worth it. It’s been a fascinating and volatile time to be investing in Chinese stocks. And while are returns have not been up to our standard over that time frame as a result, we still believe in China's long-term potential. Simply put, It’s the world’s fastest-growing economy and will soon be the world’s largest.
But does that matter?
There are certainly reasons to be wary of China. At the company level, many listed companies continue to struggle with basic internal controls and corporate governance. At the macro level, we got word recently that China needs to bail out debt-laden local governments to the tune of hundreds of billions of dollars. If China turns off the spigot of easy money, we could certainly see a near-term slowdown.
If you're reading this, you're a Fool -- which means you're willing to take a long-term approach, and we intend to make investing in China a part of our investing process at Motley Fool Global Gains for a very long time. That's because in addition to China's growth profile, the country is getting better at the things it needs to do to reward investors. So even if 2011 has been a rocky year for our China investments thus far, I believe when we look back in a few years, we will see that these trips were all very much worth it. That’s particularly true with year’s trip when so many of the promising companies we plan to meet with have had their stocks beaten down by a skeptical market. [more]