Many Americans are interested in how they can take advantage of China’s growth.
For a multibillion dollar private equity fund like Blackstone,
it’s not that hard. Major American financial institutions have moved “all in” with billions
committed to seeking China opportunities. However, these are the same financial institutions
that helped cause the financial crisis in the United States. Do you really believe these
institutions care about anyone but themselves and their affluent investors? We don’t think
So what are individual investors to do? There is a tremendous amount of risk investing directly into a Chinese private company. Why? This may sound like a great idea but remember that China has a completely different political system that is not just different from a sovereign nation standpoint but also very different from a provincial, and then a city level.
The best way to invest in China is through buying Chinese public companies that are listed on U.S. stock market exchanges. We have thorough due diligence packages and analysis on all 78 of these companies. We run highly sophisticated computer programs to track and analyze each company. Plus we have U.S. educated analysts living in China gathering crucial information that no one else has.
Ask someone who has done business in China on a private level and ask about their experience. Unless you know what you are doing and have the right contacts the chances of being taken advantage of is not worth the upside. You may be saying “this is the case doing business anywhere in the world”. However, China’s system is so very different from the way the Western world functions that you would not recognize what is going on.
From an investment perspective if Chinese private company opportunities should not be considered then what is left?
Perhaps investing in US companies that do business with China could provide significant returns. The problem with this rationale is that almost all major American companies already have China exposure either directly or indirectly.
Investing in these giant American conglomerates may seem less risky. What happens in a situation where the Chinese side of the business is growing significantly while the U.S. lags? Wait…this isn’t a hypothetical situation any more…this is what is happening RIGHT NOW!
This section is titled Investing in China and you are here at the ChinaVesting website because you want answers. We’ve done enough dancing around so here is the answer.
The best way to invest in China is through buying Chinese public companies that are listed on U.S. stock market exchanges.
Here are the reasons why:
Compliance And Scrutinity
It is extremely difficult to take a Chinese company publicly in the United States. We are not talking about this from a technical or legal perspective. Rather our focus is on the fact that Chinese business owners are not transparent. We cannot even begin to tell you the magnitude at which these business owners guard their company’s privacy.
Going public forces the company to open the information floodgates and most of the time what comes out is not pretty. If a Chinese private company is willing to subject themselves to the scrutiny of a full blown U.S. PCAOB audit and then to provide all necessary documentation then that is a good beginning. The problem is many times the PCAOB audit cannot be completed and or there is missing documents that are needed but not producible.
There are many more Chinese companies that fail to make it to the U.S. public markets after trying than actual successes. If a Chinese company makes it through the gauntlet and is able to list on a U.S. stock exchange then that is passing the first test. Obtaining a U.S. listing is an accomplishment and deserves recognition. The going public process essentially cleanses and filters companies that are suspect which gives investors more confidence that the company is worth considering as an investment.
The compliance and scrutiny filter is just the beginning.
Once a Chinese company has become public the next thing China Vesting looks for is corporate governance. Does the management team know how to be a U.S. public company? If not then are there people in place that do know what they are doing? How do we really know?
This is where focusing on senior listed Chinese companies trading on the NYSE AMEX or NASDAQ provides the corporate governance filter. In very rare instances ChinaVesting will find companies that are on the OTCBB which are in the process of moving onto a senior exchange. These companies, although on the much inferior OTCBB, should be considered only if the company has filed its senior exchange application and the chances to be accepted is all but guaranteed.
The listing requirements for the NYSE AMEX and NASDAQ are below:
Growth And Valuation
This is the last and final section when it comes to why the best way to invest in China is through buying Chinese public companies that list on U.S. stock market exchanges. ChinaVesting believes it is also the most important purely from an investment perspective.
Many of the Chinese companies that trade on U.S. exchanges are focused on the Chinese domestic market. That means these companies have the highest exposure when it comes to taking advantage of China’s internal growth. This means that these Chinese companies also have stronger than average growth compared to their U.S. counterparts.
The U.S. market is essentially mature with our economy being fully developed. For most American businesses the model is to take market share from competitors whereas in China companies are creating markets.
How long will the growth last? No one has a definite answer but ChinaVesting believes that there is a window of at least two years from 2010-2012 where things will be at the status quo or better. What’s our thinking? Politically there will be a new regime in China come 2012 with a new president taking over for Hu Jing Tao. Until the next president is announced ChinaVesting believes the window is at minimum two years.
With growth being something that is sustainable for the immediate future final criteria ChinaVesting looks for is valuation. As a whole, most of the Chinese companies in the ChinaVesting Index trade at significant discounts to their U.S. counterparts. The reason is simple; there are more shareholders of the U.S. counterparts than the Chinese companies. Will this ever change?
ChinaVesting believes that there will be a paradigm shift where more people will accept investing in U.S. listed Chinese companies. The valuation gap will close and it would not be surprising that the current discount becomes a premium.
If the growth of U.S. public companies continues to lag then investors will look to substitute these companies from their portfolios. The process has already started with U.S. investment banks making large sums of investments in U.S. listed Chinese companies. Guess who is investing in these companies through investment banks? Predominantly hedge funds that already see the writing on the wall.
The problem for the institutions is that many of the companies that have received financing from investment banks and the hedge funds that back them are trading at a discount to the financing price. This creates an opportunity for individual investors to benefit off of the current disconnect. ChinaVesting is focused on finding undervalued opportunities where there is tremendous upside once investors discover the company. Our ideal company trades at a Price to Earnings ratio (P/E) less than the industry average while offering tremendous growth in next year’s earnings.