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JakilaTheHun (99.94)

Chinese Consumer Stocks

Recs

26

October 05, 2010 – Comments (29) | RELATED TICKERS: FXI , NCTY

Normally, when I post a blog here on CAPS, I am writing about stocks I like or macroeconomic issues.  Today, however, I am posting because I want HELP!  And no better place to poll for help than here on CAPS. 

I am looking for Chinese consumer stocks.  Not Chinese exporters --- which I want to stay one million miles away from.  Essentially, I am seeking out Chinese companies that would benefit from increased Chinese consumer spending and have reasonable growth prospects.

 

Right now, I have precisely one Chinese stock in my portfolio:

The 9 Ltd. (NCTY)

 

Looking to potentially add more, but have had little luck finding non-shady companies that operate in the consumer segment. 

Give me your suggestions, CAPS! :)

29 Comments – Post Your Own

#1) On October 05, 2010 at 1:35 PM, Bays (30.45) wrote:

Jakila,

Read my blog and scroll down to Zungui.   It was listed on the TSX-V via an IPO (not a reverse merger).  Not sure if you can trade on that exchange.  It will benefit greatly from increased consumer spending, and also a stronger currency (it reports in CAD). 

Reasons for buy:

Financial metrics were extremely undervalued given their history of growth and, of course, their potential of growth.
Cash flow positive. 
Exposure to China.  Also didn't have any retail in my portfolio.
I bought a few weeks back at 1.83, so I felt there was not a lot of downside risk with the company's huge cash position and little debt (1.10/share at the time, now up to 1.35/share since their latest annual filing). 
Compared to it's peers, their ratios were much lower.
ZUN is not followed by Bay/Wall street, and is relatively unknown in the trading world (for now).  I like that.

Risks:
Chinese mgmt.  However, I believe that the risk is mitigated by the method they chose to list (not a reverse merger), their auditor (E&Y), and also Ryan Irvine's track record for choosing Chinese companies listed in North America.

Their website was pitiful a month back and has greatly improved as of late.  I think there is still a lot of work left; E-commerce, Investor Presentations, etc.....

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#2) On October 05, 2010 at 1:42 PM, portefeuille (99.60) wrote:

http://quicktake.morningstar.com/etfnet/Holdings.aspx?Country=&Symbol=CHIQ

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#3) On October 05, 2010 at 1:43 PM, portefeuille (99.60) wrote:

http://caps.fool.com/Ticker/CHIQ/Scorecard.aspx

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#4) On October 05, 2010 at 1:49 PM, portefeuille (99.60) wrote:

I like the name of this company ...

Want Want China Holdings (151:HK).



enlarge

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#5) On October 05, 2010 at 1:50 PM, Bays (30.45) wrote:

An ETF is always a good starting point for ideas. I would suggest just buying the ETF itself, but I'm sure you're more than capable of picking out the winners! ;)

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#6) On October 05, 2010 at 1:51 PM, Griffin416 (99.98) wrote:

YUM. They are growing in China very fast and consistent. The KFC stores there are actually nice restaurants, not fast food crap like in America. Nice, easy and safe exposure to the Chinese consumer.

I don't trust Chinese stocks (debate aside) I like stocks like FCX and BHP that sell to the Chinese.

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#7) On October 05, 2010 at 1:52 PM, portefeuille (99.60) wrote:

-----------

Want Want China Holdings Limited manufactures and trades rice crackers, snack food, beverages, and packing materials. The Company also manufactures wheat, flour, and raw materials for the manufacture of snack foods. Most of the company's production facilities are located in China and Taiwan. 

-----------

(from here)

market capitalisation: around 12.5 billion USD.

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#8) On October 05, 2010 at 2:16 PM, SweetMircha (93.98) wrote:

Jakila, I know what you mean about Chinese stocks.  I own a few of them myself like APWR, CGA & FUQI. They're all like lumps of coal inside my boots. It hurts to look at their value dropping daily.  All losers.

I'll check Bays suggestion as I have a large TSX & TSX-V portfolio myself. Buy Canadian they say and, I do, making good profits/dividends on them.

Good luck Jakila.

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#9) On October 05, 2010 at 2:35 PM, TigerPack1 (98.39) wrote:

The only two Chinese stocks I like in "game" portfolios are: CSR and ABAT.  I own neither in the real world.

UltraLong knows more about China stocks trading in U.S. than most of us (from a basic fundamental, quant view).  I am sure you saw his China blog a week or two ago, and he started UltraChina on CAPS I think.

-TigerPack

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#10) On October 05, 2010 at 2:52 PM, 100ozRound (29.57) wrote:

VIMC is worth a look - good cash position and little to no debt.

A speculative stock that I think it's worth a glance at least

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#11) On October 05, 2010 at 3:30 PM, IlluminatInvest (70.96) wrote:

BORN and LIWA

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#12) On October 05, 2010 at 3:57 PM, TMFBabo (100.00) wrote:

I just sifted through my watch list and realized most of my Chinese stocks aren't consumer-related.  I picked out three: ALN, CCME, and NIV.  I currently have modest real life positions in all three.

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#13) On October 05, 2010 at 4:14 PM, pennystockguy (84.81) wrote:

JADE.

I own it and I think that you will find I am pretty good at finding stocks under $7.50 primarily. This is a play on retail, jewelry (precious metals).....

It had a big pop today on no news which probably means info was leaked in China. All the other China stocks I have picked on CAPs are breakeven or negative. I did own CNTF, but sold it at breakeven because it was going nowhere while all my other stocks were going up.

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#14) On October 05, 2010 at 4:15 PM, Rehydrogenated (32.49) wrote:

Right now, I am short only one stock:

NCTY

I am long 3Sbio:

SSRX

The9 saw a 93% revenue decline and only managed to cut expenses by 20%. Have you played their other games? It only takes a few hours to download them, most of them are free to download. I know you won't want to take the advice of a shorter...but please do a second round of due diligence. The9 does not license games, they licensed (1) game and now that it is gone, they are desparately trying to diversify. Meanwhile, their unused assets (servers) lose value every day.

As for 3SBio...

This is a pharmeceuticals company that steals foreign drugs (including patented drugs), copies them, changes their names or sells them to doctors with blank labels(so it takes awhile for people to find out), and resells them at a huge profit. They also manufacture a lot of legit drugs, at a huge profit. Although throwing your money in with a company that takes other companies patented products may seem risky, 3SBio produces quality drugs and are protected from litigation by the Chinese government who doesn't feel like paying top dollar for those drugs.

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#15) On October 05, 2010 at 4:40 PM, JakilaTheHun (99.94) wrote:

Thanks for all the suggestions, everyone.  Some of them do look intriguing --- I'll have to do a bit of research. 

 

Bays,

Zangui sounds interesting.  Thanks for the pick. 

I actually wish the US had an equivalent to the TSX-V, but we don't.  I assume it is mostly because of the regulatory environment here in the US, coupled with the fact that we don't allow IFRS --- only US GAAP.  

 

Port, 

Not much of an ETF investor, but I'm glad you posted that since it lists all of the stocks in the ETF. 

 

100ozround, 

I'm definitely going to look into that one.  I've analyzed similar stocks in the US before and know the dynamics.

 

Rehydrogenated, 

Why wouldn't I take the advice of a shorter?  I want to make a positive return; I have no particular emotional interest.  If I'm wrong, I'd rather no I'm wrong sooner rather than later.

My response to your argument would be "so what?"  The market already knows about all of that --- and has for a long time. But they have to lose an absolute s@#$load of money for an extraordinarily long period of time to justify the dismal share price. 

As far as shorts go, I'd rank NCTY as a really terrible one. Which doesn't necessarily mean it's a good long investment, either.  If the company is unable to generate a favorable return on its investments over the next few years, the stock will still be a loser. But at least there's a huge margin for error.  They could pretty much make a 0% return and the stock would be worth 2X what it is now. 

I don't see it as a good short at all.  It's clearly not overvalued; their net cash position is greater than the share price. You're making an all-in bet that management continues to lose money for about a half-decade before going bankrupt.  You might be right --- but I like playing when the odds are much more in my favor. 

 

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#16) On October 05, 2010 at 6:41 PM, rhallbick (99.64) wrote:

A fair number of US, Japanese, Korean and Taiwanese companies have already made good penetration into the Chinese consumer market, like YUM! - mentioned above, or Walmart, Pepsi, Corning, Samsung, etc.

There's a good number of US incorporated companies, established by Chinese to sell to Chinese consumers, that I always think are a little shady, like American Dairy (ADY) and American Oriental Bioengineering (AOB).

There's the internet stocks, Baidu and Ctrip, which have run a lot in the last year.

All of this you probably already know, but I'm just listing the options.

When RT-mart, China's smallish version of Wal-mart, was seeking to do an IPO this past summer, it was to be on the Hong Kong exchange.

It may well be that the companies you seek will generally be on that exchange.

At least some of the major Chinese newspapers are available, in English, on the web for a source of ideas.

It's interesting that I was just thinking about this same thing this morning.  The Chinese labor force is clearly going to receive a higher proportion of the national GDP in the future and they will spend most of it.  Their savings rate has been long-term consistent at about 27%, so you could expect 73% of wage increases going to cars, furniture, appliances, clothes, food, electronics, vacations and housing.  I hope they don't throw it away on over-priced condos.

Anyway, I am just getting started on my research also and will also check out the suggestions in the other replies.  I think that there is plenty of time to try to make good selections (non-corrupt).  If it gets a chance to play out, it would be a multi-decade secular change.

Good Luck, RH

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#17) On October 05, 2010 at 6:51 PM, mrindependent (90.66) wrote:

Hi Jakila,

The best I can come up with is ATV and FEED.  See my pitches.  Feed is not really a consumer stock, but it suits the goal that you are striving to achieve- as long as you can swallow the pitiful earnings and the fact that the company's direct marketing tactics are not likely to be "beyond reproach".

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#18) On October 06, 2010 at 12:49 PM, TigerPack1 (98.39) wrote:

All right, I buckled and bought some ABAT today at $3.61, based on UltraLong's UltraChina feelings and Jakila's new interest in Chinese stocks.  Plus, ABAT has been one of the members of the WSS portfolio practices since March, and has outperformed the majority of Chinese stocks since then.

I need to have more overseas based and priced investments anyway to get out of the Dollar-based stuff that is about to have real problems.

I like ABAT's business and products, balance sheet, growth rates and history.  Watching them since March, management seems to have a decent idea what they are doing to grow the business with $100 million in cash and working capital and something like $10 million in long-term liabilities, vs. a market cap of $250 million, making small complimentary aquisitions.  HUGE profit margins, alongside quickly advancing revenues and earnigns are a plus, as is 6x EPS stock price for 2010!!!!

What really pushed me to buy today was one of my better proprietary volume accumulation indicators I have developed for  stock trading activity in small caps with decent short interest (ABAT is about 10% short of float), WENT INTO STRONG BUY MODE A DAY AGO.

Today's weakness may be a gift for new owners, as will any price weakness the next couple of weeks.  Someone (a large long, or short covering) is acquiring shares, and this buying should give ABAT a good chance at outperformance of the general stock market the next month or two.

-Tiger Out

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#19) On October 06, 2010 at 1:44 PM, JakilaTheHun (99.94) wrote:

TigerPack,

I wouldn't get too bullish based on my post.  I'm very skeptical of everything China.  I want to research Chinese consumer stocks more because I think there's an increasing possibility for international currency reform, which will change the nature of the Chinese economy. 

Without major reform, I actually think that China is essentially bankrupt. It's not really obvious to people yet, but they are sitting on something like $2 trillion in overvalued US Dollar assets and their entire manufacturing sector is effectively based on paying out huge government subsidies to US consumers. 

Once that ends, Chinese consumer stocks might actually be able to gain some ground.  If it doesn't end, things could get really ugly eventually. 

 

As far as international equities, I find myself more interested in Latin America, the Middle East, and SE Asia; but we don't have great access to companies in those markets here in the US. 

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#20) On October 07, 2010 at 12:20 PM, Rehydrogenated (32.49) wrote:

The9 had multiple stock offerings to raise cash. This cash was spent on cutting-edge servers (from 2005ish-2007), which were extremelly expensive. The9 is counting depreciation on this servers as "cash". I don't know the exact accounting rules in China, maybe they are getting a tax refund based on their current losses and depreciation for revenues earned years ago, but the "cash" they claim to have is tied up in unused capital they failed to sell. In a year their cash flow will go from -$69,940,000 to -$95,493,000 (est.). They have $303 Mil in capital surplus and supposedly 245 Mil in cash. Investing in a Chinese company that only makes $3.3 mil in revenues per quarter is risky.

I'm not betting they go bankrupt in a decade, I'm betting it will take them a decade to make money and shareholders will get tired of waiting (it will go down before it goes up).They have a lot of potential in buying Red 5 Studios, but that will be more immediate expenses for a long-term gain. 

 

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#21) On October 07, 2010 at 12:54 PM, TigerPack1 (98.39) wrote:

China also has $2 trillion in foreign reserves and no real debt to outside nations.

The U.S. has $15 trillion in sovereign debt, which it can NEVER repay, adding to it by $2 trillion or so a year, and a trade imbalance with the world that is causing another $500 billion in wealth to be sucked out of this country to other nations annually.

China has little leverage/debt in the economy by businesses and consumers, especially when compared to the U.S.  Any debt problems can be solved quite easily with $2 trillion in cash laying around (and growing $400US billion yearly!) from China's massive trade surplus which will grow markedly into 2011-2012.

China's balance sheet is in the B or even A range... The U.S. balance sheet is F- territory vs. the history of nations, using Adam Smith's "Wealth of Nations" guidelines written 200 years ago.

This balance sheet flexibility will allow China to continue growing, even if America erects tariffs and starts a trade war.  Since American business is incredibly tied to plant and equipment and cheap labor over there today, a trade war would devastate the U.S. supply chain and bankrupt half of the large businesses here (representing a massive chunk of stock market wealth).  Can you imagine going into Wal-Mart in a month and the shelves are half empty????  Just in time inventory and a monstrous import of goods problem could collide with a China/U.S. trade war.

China owns U.S. stocks and bonds to the tune of $2 trillion and now has a bigger say in how this country is run, larger than any other nation at any time in American history.

Again Geithner and BEN are not thinking straight, but what else is new, expecting China to leave the Dollar peg, when we will not stop deficit borrowing at suicidal rates.  [The lower Dollar of late will actually make China even more competitive than their neighbors in terms of labor and productivity costs, as the unofficial Yuan peg is following the Dollar down!]

Chinese leaders are ten times smarter than American ones, and this is clearly evident in 8%-10% annual economic growth rates in China the last 20 years (since President Clinton sold the farm, and gave China most favored trade status with no strings attached), vs. 2% in the U.S.!!!!

When given a level-headed choice between a strong balance sheet, above average management, and a booming economy, why would I invest in a bankrupt balance sheet, with poor managers and a failing economy????

At least that's the argument to invest in China right now.

-TigerPack

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#22) On October 07, 2010 at 1:30 PM, JakilaTheHun (99.94) wrote:

Rehydrogenated,

How well do you understand accounting? 

When you say they are counting "depreciation" as "cash", do you mean to say that they add back depreciation on their statement of cash flows?  Because the reason they do that is precisely because depreciation is a non-cash charge. 

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#23) On October 07, 2010 at 2:52 PM, TigerPack1 (98.39) wrote:

http://www.fool.com/investing/high-growth/2010/10/07/should-you-sell-advanced-battery-technologies-righ.aspx

Good story posted today on Motley Fool looking at ABAT.  I put my two cents in the comment section at bottom of page.

The story headline is deceiving!

-TigerPack

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#24) On October 07, 2010 at 4:09 PM, Rehydrogenated (32.49) wrote:

You're right, I was never really paid attention in accounting.

The cash flow estimate and the depreciation thing were supposed to be two seperate statements. For the past 2 years The9 's income tax was positive about 20-30 Mil. So they were getting an income tax rebate. The huge amount of depreciation they are putting on their books helped to boost the amount of the tax rebate.

But when that rebates dry up they will be losing nearly 90 Mil per year (they are currently losing 60 Mil). Even their last quarterly report says they were only able to cut expenses by less than 10% YoY. Huge server farms are expensive and lose competitive edge very quickly. 

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#25) On October 07, 2010 at 5:18 PM, JakilaTheHun (99.94) wrote:

Rehydrogenated,

That's not how it works. 

Depreciation is taken on all capital assets.  It is an accounting concept.   When a company purchases an asset, instead of expensing it immediately, it will determine a useful life for an asset and will depreciate the total of the entire time frame.  So if a company owns an asset with an estimated life of 10 years that cost $100,000, they might depreciate $10,000 per year for 10 years.

It's not a "rebate".  It's an expense. Hence, it's not taxed. 

Nor is an "income tax benefit" a rebate, either. Companies receive income tax  benefits to charge against future profitability.  This is because most countries recognize how business cycles work and they aren't going to charge a higher rate of taxes for companies that had losses for a few years.  Rather, they allow them to use the "income tax benefits" accumulated in the loss years against the profitable years. 

If I were you, I would not be shorting NCTY.  You clearly have no idea what you are talking about, and going short on a company when you don't even understand the basic accounting is not a good idea under any circumstances. 

 

As far as their recent earnings releases go, they were actually quite positive. They've managed to grow revenues fairly quickly after losing rights to WoW.  Not sure if that growth will hold up or if they'll fail in their investments, but your analysis seems to be totally based on something the market knew nearly a year ago --- that NCTY lost the rights to host WoW. 

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#26) On October 07, 2010 at 5:30 PM, bluebare (30.32) wrote:

Check out CNYD.  Watch for possible entry point AFTER upcoming earnings. DD should reveal why.

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#27) On October 08, 2010 at 3:38 PM, Rehydrogenated (32.49) wrote:

Hm...guess I have to brush up on my accounting. But thanks for taking the time to explain it. I think I'll stay away from the math. 

As for your faith in the market "already knowing"...that's a pretty dangerous assumption.

 

 

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#28) On October 11, 2010 at 11:04 AM, astroboy356 (27.27) wrote:

Jakila,

ENHD is in the pork business, and they trade at a very low multiple.  I do not own any shares but I have been watching it for some time.

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#29) On October 12, 2010 at 10:08 AM, TigerPack1 (98.39) wrote:

Nearly DOUBLED my ABAT stake under $3.80 a share this morning.  The more I think about it, the more I like this one!  Plenty of meat to feast on down the road.

-TigerPack

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