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Chinese Stocks Promise Higher Potential Gains?

By for Profit Confidential

Three Keys to Profiting from China-Based StocksIf you think Chinese stocks are too speculative to consider and buy, then you need to read what I’m going to say over the next few paragraphs.

Yes, it’s true that China-based companies have subjected U.S. capital markets to erroneous results and reporting in the past and that it is likely continuing to some degree, but that does not mean you should bypass Chinese stocks. You just need to be extra careful.

With the recent moves by the U.S. Securities and Exchange Commission (SEC) to force Chinese companies looking to list in the United States to use approved auditors along with other tighter reporting requirements, we have seen the flow of China-based initial public offerings (IPOs) dry up. There were only about two Chinese IPOs setting up shop on U.S. exchanges in 2013; so far, this year has proven to be no different.

Yet the reality is that Chinese IPOs continue to attract frenzy when they list here, perhaps due to the limited issues. The biggest coup was the recent decision by China-based e-commerce giant Alibaba Group Holding Ltd., which decided to list in the United States and bypass Hong Kong. The IPO is estimated to be at around $15.0 billion and will be the largest IPO listing from a Chinese company. The reason for the decision, I believe, is the currently extremely receptive environment for IPOs in America. It’s likely Alibaba will create so much buzz that its share price will explode out of the gate for those lucky enough to own shares.

The reality is that even if you cannot get your hands on Alibaba, which has … Read More

Why the Chinese Economic Slowdown Matters

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Chinese Economy to See Black Swan Type EventUnderstanding the economic slowdown in the Chinese economy is very important because not only does it impact American companies doing business there, but what happens in the Chinese economy—now the second-largest economy in the world—affects the global economy.

While media outlets tell us the Chinese economy will grow by about seven percent this year (30% below the 10% the economy has been growing annually over the past few years), the statistics I see point to much slower growth.

In February, manufacturing activity in the Chinese economy contracted and hit an eight-month low. The final readings on the HSBC Purchasing Managers’ Index (PMI) for February showed manufacturing output and new orders declined for the first time since July of 2013. (Source: Markit, March 3, 2014.)

And there are other troubles. The shadow banking sector in the Chinese economy shows signs of deep stress, but we don’t know how much money is really on the line here. China keeps much of its real economic news to itself, but we do hear how firms that are involved in the sector are defaulting on their payments.

And the Chinese currency, the yuan, keeps declining in value compared to other major world currencies. The Wisdom Tree Chinese Yuan Strategy (NYSEArca/CYB) is an exchange-traded fund (ETF) that tracks the performance of Chinese money market instruments and the yuan compared to the U.S. dollar. Look at the chart below:

WisdomTree Dreyfus chinese Yuan fund ChartChart courtesy of www.StockCharts.com

Since the beginning of February, the Chinese yuan and Chinese money market instruments have been showing signs of severe stress, largely unnoticed by mainstream media and economists.

There is no doubt in my mind … Read More

How to Play the Growth in China

By for Profit Confidential

Why Investors Shouldn't Bypass ChinaFor the first time in more than three years, Chinese stocks are beginning to show some promise for growth investors looking for opportunities outside of the United States.

The benchmark Shanghai Composite Index has moved to just above its close of 2013; hence, it’s more or less in line with the S&P 500 and Dow Jones Industrial Average.

Many of you are aware of my continued bullishness for China, as I have talked about this in recent commentaries.

We saw some encouraging estimates on Tuesday. The country’s industrial output is estimated to rise 9.5% this year, which could support gross domestic product (GDP) growth of 7.5%, according to Industry and Information Technology. (Source: “China targets factory output growth of around 9.5 percent in 2014,” Reuters, February 17, 2014.) What’s interesting is that the key areas of growth for this year include telecommunications, along with a big jump in business for software and information technology (IT).

You can play the growth in these areas via Chinese IT services firms, such as iSoftStone Holdings Limited (NYSE/ISS, $5.15, Market Cap: $297 million), a provider of IT services to clients and globally. Services include consulting and solutions, IT services, and business process outsourcing. The company is growing with its headcount increasing 27% to 17,702 in the third quarter compared to the same time in 2012. Broken done, 65.1% of the company’s global sales came from the Greater China area, 21.4% were from the U.S., Europe accounted for 7.3%, and Japan made up 5.8%.

Analysts expect iSoftStone to report revenue growth of 13.6% to $432.81 million in 2013, followed by 17.8% to $510.06 million … Read More

If You Can Take the Risk: My Top Three Chinese Stocks

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Could These High-Risk Stocks Pay OffWe all know about some of the insane valuations with social media and Internet services stocks, such as Twitter, Inc. (NYSE/TWTR), Facebook, Inc. (NASDAQ/FB), and Yelp, Inc. (NYSE/YELP), as I have discussed in these pages before. (Read “Two More Internet Stocks to Watch.”)

These valuations make it extremely risky to buy, as a change in the market perception and valuation could lead to a sell-off in the stock, as was the case for Twitter recently.

Now, if you are willing to assume the risk, there are some more attractive Chinese Internet and social media stocks that offer far better valuations than their American counterparts, but these China-based companies also come with much higher risk.

A look at the valuations of these Chinese stocks really doesn’t tell us much, but based purely on strict metrics and valuations, these Chinese stocks look pretty good—in fact, the prices of these Chinese stocks seem too good to believe. And therein lies the risk: due to the questionable reliability of the financial reporting, auditing, and statements in China, these Chinese stocks carry a lot of risk. Sometimes, it seems as though numbers have been made up to suck in investors and drive the share price higher.

The U.S. Securities and Exchange Commission (SEC), as I said in a previous commentary on China, has been trying to clean up the reporting requirements and offer some potential hope that the numbers being reported are valid. While it’s a good step forward, there’s still no guarantee that crooks will not escape the watch of the SEC.

I was reading how there may be 30 or so … Read More

Investment Opportunities in Depressed Chinese Stocks

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Where to Find New Investment Opportunities in the Emerging MarketsThe Securities and Exchange Commission (SEC) is currently shutting down numerous Chinese shell companies trading on U.S. exchanges, such as the over-the-counter market and the highly speculative Pink Sheets stock exchange.

This is good and is something the SEC needs to continue to pursue and enforce, so domestic investors can regain some lost confidence towards Chinese stocks.

The American appetite for Chinese stocks has been picking up; albeit, it’s nowhere near where it was a few years ago when Chinese stocks were all the rage.

Yet if you think there’s little interest in Chinese stocks, take a look at some of the sizzling debuts of the few Chinese initial public offerings (IPOs) that listed in the U.S. last year.

There are now worries China may be set for a downside slide. I have been hearing how the Chinese economy was set to burst, especially regarding the real estate and financial sectors in China. So far this has yet to happen, but we are continuing to hear continued bearish comments towards China.

It’s true the Chinese economy is stalling and may find it difficult to get back to its former double-digit growth, but with gross domestic product (GDP) growth at 7.7% in 2013 and estimated to rise 8.2% this year, according to the Organisation for Economic Co-operation and Development (OECD), these are not bad numbers. By comparison, the U.S. economy is predicted to grow 2.9% in 2014, according to the OECD. (Read “OECD Predicts China #1 Economy by 2016; Consumer Spending to Soar.”)

A recent showing of contraction in Chinese manufacturing in January was used by the Chinese bears … Read More

Peak Over for U.S. Travel Stocks, but China’s Travel and Lodging Stocks Just Getting Started

By for Profit Confidential

Chinese Travel and Lodging Stocks to Consider This ChunyunThe Chinese are on the move and unless you enjoy crowds and mass chaos on the roads, rails, and in the sky, I don’t advise you ever go and visit China during this time of the year.

This very intensive travel period is the busiest in the Chinese calendar year—akin to Christmas and Thanksgiving Day, but much more chaotic when you consider the size of the population. In China, it’s known as “Chunyun”—a 40-day period around the Chinese New Year when the masses (and we mean masses when talking about China) scramble to travel. This is the time when families reunite for big dinners, to set off fireworks, and to share their plans for the year ahead.

If you think Black Friday or New York City at their peaks were bad, it’s nothing compared to what happens in China during this stretch, which would even make the native NYC commuter queasy.

According to the National Development and Reform Commission (NDRC), about 3.62 billion passenger trips will be undertaken during this 40-day stretch. (Source: “Transport system to be fully stretched for ‘Chunyun,’” ChinaDaily.com, January 14, 2014.) That’s a lot of people.

And whether it’s the roads, rails, or sky, everything will be one big massive network of travel: Approximately 258 million train rides will occur during the period, according to the China Railway Corporation. In the sky, there are estimated to be around 42 million flights, based on predictions from the Civil Aviation Administration of China. And the roads…well, think “parking lot.” (Read “My Favorite Chinese ‘Car’ Company.”)

Yet while we can avoid this somewhat-organized chaos, you can rest … Read More

My Favorite Chinese “Car” Company

By for Profit Confidential

Chinese Roads Spells Opportunity for U.S. InvestorsIf you don’t believe China is the world’s largest auto market, then you probably have never been to Beijing or Shanghai, where the traffic gridlock makes Congress here seem pretty lax.

Despite the Chinese government’s ongoing efforts to regulate the number of vehicles on the country’s roads, especially in the bigger megacities, the Chinese auto market continues to be a major growth market for many foreign automakers, including General Motors Company (NYSE/GM) and Ford Motor Company (NYSE/F), which I have discussed in the past. (Read “Where to Find the Best Potential Growth in the Automotive Industry.”)

The statistics don’t lie. In 2013, sales of vehicles in the country surged a staggering 13.9%, according to the China Association of Automobile Manufacturers. The growth was welcomed by Chinese auto sellers, given that growth stalled to 2.45% and 4.33% in 2011 and 2012, respectively. The folks at General Motors and Ford are probably salivating at these numbers.

For a more conservative approach to play the Chinese auto market, you could keep things in the U.S. and play the growth through General Motors and Ford. Or, if you are willing to accept the higher risk, you could look to U.S.-listed Chinese companies to play the market directly.

A small Chinese auto parts play that you should take a look at is Zhangzhou City-based China Zenix Auto International Limited (NASDAQ/ZX, $2.53, market cap: $131 million). The company designs and makes commercial vehicle wheels for China’s aftermarket and original equipment manufacturers (OEM) market.

China Zenix Auto Intl Ltd. Chart

Chart courtesy of www.StockCharts.com

The company has been around a little more than a decade. Its products are of high quality, … Read More

China’s Macau Gambling Region: The Growth Opportunity

By for Profit Confidential

China’s Macau Region a Good Bet for InvestorsSpain just rejected a massive $30.0-billion proposal from Las Vegas Sands Corp. (NYSE/LVS) to build a casino and entertainment resort near Madrid. The project would have been significant, with 12 hotels, six casinos, and many other amenities injecting some life into the stagnant country where the unemployment rate sits around 26%.

Now, the Spanish government had its reasons to turn down the deal; they centered largely on the associated activities that could surface when casinos and gambling arose. The same thing occurred in Toronto Canada, in which a $5.0-billion casino hotel project was also rejected.

But as is usually the case, a region’s loss is another area’s gain. Casino operators are always looking for growth and much of it has been focused on emerging markets outside of Las Vegas and the United States, in areas such as Asia and, more specifically, China where there is incredible wealth being created. But whether or not you like the casino industry and for whatever reasons, there will always be regions around the world that will welcome multibillion-dollar investments.

At this point, the top destination for casinos is Asia, or more specifically, the Macau region in China, which the Chinese government has supported as a region for gambling. China has designated economic development zones across the country and Macau has been designated a special administrative region for legalized gambling to attract the newfound wealth. (Read “China’s Expected Baby Boom a Boon for U.S. Business.”)

Make no mistake about it: Macau could eventually become the most sought-after region in the world for casino operators.

After its rejection in Spain, Las Vegas Sands shifted … Read More

Three Profitable U.S. Plays on the Lucrative Chinese Auto Market

By for Profit Confidential

Chinese economyIt’s no secret that China is the biggest market for numerous raw materials, such as cement, steel, coal, copper, and oil, along with end-products, such as vehicles and mobile phones.

The growth of the middle class and wages in the country is the vital attraction for companies to go and set up shop there. Credit Suisse estimates the household wealth in the country will double to $35.0 trillion by around 2015, based on achieving sustainable gross domestic product (GDP) growth at or near the current growth rate. Moreover, the government’s strategy to drive domestic consumption will also help to push up the demand for goods and services.

An area in the Chinese economy that I continue to believe has tremendous long-term potential is the auto sector, but the short-term will pose some hurdles due to some buying limits imposed by the government.

The Chinese motor vehicle market is the largest in the world, and it continues to distance itself from the United States. The upward demand for vehicles remains in spite of the government’s efforts to limit vehicle sales in many of China’s largest cities in an attempt to cut pollution.

As a potential market for vehicles, China remains tops. Auto sales surged 16% in November following a 24% jump in October, according to the China Association of Automobile Manufacturers. (Source: China Association of Automobile Manufacturers web site, last accessed December 11, 2013.) About 1.7 million vehicles were sold for an annualized growth of 20.4 million. By comparison, sales of autos increased nine percent in the United States in November to an annualized rate of 16.4 million vehicles, according to … Read More

Apple Finally Takes Step That Will Bring the Company to the Next Level

By for Profit Confidential

Apple Enters Deal with China Mobile dalindar Just last Thursday, Apple Inc. (NASDAQ/AAPL) revealed its long-awaited and worst-kept secret when the maker of the “iPhone” and “iPad” reported it would align with China Mobile Limited (NYSE/CHL) to push its products into China, a very lucrative market for the smartphone giant.

The deal, while somewhat newsworthy, was not a bug surprise to the markets, as evidenced by the stock slightly edging upward by a little more than three percent on the news.

Now, you may be wondering why the stock market simply shrugged at the news, given that China Mobile is the biggest mobile deliverer in the world, with about 730 million subscribers.

Obviously, that’s a huge number of potential buyers and added revenue channels for Apple. But the deal really doesn’t mean Apple will be going back to its previous high above $700.00, reached in September 2012. The reality is that Apple needs to be able to find Chinese buyers for its somewhat expensive (or overpriced) smartphones and tablets.

The target market is there, and it’s probably closer to about 300 million people or so, based on the number of middle-class consumers in China. The reason I see its potential market base being much smaller than China Mobile’s subscriber base is simply due to the company’s product pricing. I really don’t think some shopkeeper or farmer in rural China is going to dole out a major portion of their annual wages to snap up a snazzy “iPhone 5C” or “5S.” This will be the main dilemma Apple will face in this market.

The problem at the very root of this dilemma is that Apple will need to … Read More

Five Profitable Plays for the Coming Stock Market Correction

By for Profit Confidential

S&P 500The number of references to a “bubble” that we’re hearing in the mainstream is on the rise, along with the S&P 500 and Dow Jones Industrial Average, which are advancing to new record heights.

Some say the stock market will continue to rise, driven by the Federal Reserve’s likely strategy to maintain its low interest rates for another two years. There are those nervous about the tapering, but I don’t really care about that; in my view, the low interest rates are much more critical.

The stock market participants are now faced with a dilemma of whether to chase equities higher. With the gains we have seen, it makes sense to take some profits.

The reality is the broad stock market strength has also rewarded weak companies, which have been supported by the overall enthusiasm to buy stocks.

Some traders are looking at the short side, especially the hedge funds that believe the stock market is overvalued. The problem is that short-selling is not easy, especially in this kind of market. It has been difficult to make money from the short side, and as long as the bullish bias holds, I expect shorting will continue to be a tough path to making money. (Read “How to Profit by Buying ‘Bad’ Companies.”)

A better alternative to shorting individual stocks or indices would be to play a possible stock market correction via the use of bearish exchange-traded funds (ETFs), such as the Direxion Daily S&P500 Bear 3X Shares (NYSEArca/SPXS).

You can also play a possible stock market correction via the use of put options.

As a hedge, you can buy … Read More

OECD Predicts China #1 Economy by 2016; Consumer Spending to Soar

By for Profit Confidential

consumer spendingGet ready for the massive consumer push by the Chinese over the upcoming years and decades as the government strives to drive the economic engine via consumer spending.

The modification to the current one-child policy, which I recently discussed in these pages, will help create an even bigger middle class in the country that will drive up the demand for goods and services. (Read “China’s Expected Baby Boom a Boon for U.S. Business.”)

The Organization for Economic Cooperation and Development (OECD) has become more bullish on China, and predicts Chinese gross domestic product (GDP) growth will rise to 8.2% in 2014, driven by a rise in domestic consumer spending. (Source: “OECD sees China growth accelerating in 2014,” China Daily, November 20, 2013.) The OECD even goes as far as to say the Chinese economy could surpass the U.S. economy to become the world’s biggest economy by 2016. While this is faster than I expect, it’s clearly not impossible, given the rise in income levels and spending.

The middle class in China will drive the economic engine of the country, unlike what we are seeing in America with the declining spending prowess of the middle class. In fact, what we are seeing in China is similar to the power of the U.S. middle class that drove the Industrial Revolution in the late 1800s and early 1900s.

If China can emulate what happened in the U.S. then, there could be some golden years ahead for the Chinese economy.

To play the expected rise in consumer spending in China, which is increasing at double-digit rates and is likely to continue … Read More

China’s Expected Baby Boom a Boon for U.S. Business

By for Profit Confidential

Chinese economyThere you have it; the latest great news out of China, I think, will help drive sales of some U.S. companies going forward.

The news? There are going to be more babies born in China over the foreseeable future. In a surprise and strategic move, the Communist Party of China decided it was time to increase its baby population and look towards the future of the country.

Under the country’s new plan, the one child policy will be modified to allow two children per family in cases where one of the parents came from a one-child family.

As I said, this is huge; it could be a critical turning point in the direction and growth of the Chinese economy. (Read “Time to Look at Chinese Stocks Again?”) While the change in population control may seem archaic to us here in America, in China, this is a major change that could impact the country for decades going forward.

Make no mistake about it, China is ambitious and wants to expand its economy more and become the biggest economy in the world. This will inevitably happen; it could even take less than the previously estimated 20 years, given the new baby policy along with the opening of some state-operated industries to private investment and foreign companies.

And while the Chinese government wants to make sure there are sufficient babies born to replace the aging population, a key objective of the change is to inevitably drive up domestic consumption in the Chinese economy in the decades ahead.

The Chinese economy will see rising demand for food, homes, apparel, household goods, and … Read More

If Apple Does a Deal with This Company, I’d Buy the Stock

By for Profit Confidential

Apple Does a Deal with This CompanyAs I’ve written in these pages before, Apple Inc. (NASDAQ/AAPL) needs to increase its brand in the Chinese economy in order to really entice investors and jumpstart the stock. (Read “Update: Apple’s Attempts to Enter Emerging Markets a Blunder?”)

The reason is simple: China is the biggest mobile phone market in the world with over one billion users, which is more than three times the size of the United States market.

Apple is rumored to have a major distribution deal in place with China Mobile Limited (NYSE/CHL), the largest cell phone operator in the country with a market cap of $210 billion. The company services about 755 million customers as of the end of September, which is huge. (Source: China Mobile Limited web site, last accessed November 5, 2013.)

In my view, Apple could see its business accelerate if a deal is finally announced and, of course, if Apple can execute in the Chinese economy via much cheaper smartphones than the “iPhone 5C.”

For China Mobile, the addition of Apple could also generate new sales and higher margins, so it’s a win-win situation for both companies. The move towards 4G networks will also help to drive growth.

And with the rise in income levels in the cities and rural areas, we could see a major push to buy higher-end smartphones, such as those made by Apple.

China Mobile is the top mobile play in the Chinese economy. The company is bigger than Verizon Communications Inc. (NYSE/VZ) and AT&T Inc. (NYSE/T). China Mobile also owns Luxembourg-based Millicom International Cellular S.A. (OTC/MICCF), a telecom operator with mobile operations in 13 … Read More

Where to Find the Best Potential Growth in the Automotive Industry

By for Profit Confidential

Best Potential Growth in the Automotive IndustryThe auto industry is back on its feet again, following some lean years during the recession in 2008 when General Motors Company (NYSE/GM) had to be saved by the government. And whether you agreed with General Motors (GM) being bailed out or not, the reality is that the company has rebounded via massive restructuring and better leadership with a stronger vision of where the company should be headed. Moreover, GM now employs over 210,000 people, which may not have been the case if the automaker had been allowed to fail.

GM is now a $50.0-billion company, and while it is no longer the stock market leader in its backyard, the company has been able to grow a very healthy and viable business in China, where GM is the country’s top foreign automaker. Apparently, the Chinese love their GM vehicles and associate the brand with prestige and quality. (Imagine that! Maybe Americans are missing out…)

General Motors Company Chart

Chart courtesy of www.StockCharts.com

For GM, China was the path to recovery. The country has invested billions of capital into the world’s largest auto market and so far, it has paid off.

In fact, GM now sells more vehicles in China than domestically. In the first half of 2013, GM and its joint partners sold a record 1.57 million vehicles, up 10.6% year-over-year, according to the company. Sales in China exceeded the 1.4 million GM vehicles sold in the United States. Now, you can say that China actually helped to save GM from the salvage yards.

The auto market in China is potentially enormous, and its growth will be largely dictated by government policies towards … Read More

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