The Three Top Restaurant Stocks in China

investment opportunityChina has a population of about 1.34 billion people or about five times the size of the U.S. The size of the middle class is over 300 million and this is expected to grow exponentially as migrant workers watch their disposable income rise. The current per capita income is just below $4,000 a year, but it has more than doubled over the past few years and wages appear to be heading higher. With this comes more spending. The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. I have heard estimates of up to 700 million! All of this means money to spend.

The country is currently tops in auto sales, with an estimated 14.5 million vehicles sold in 2011, plus it has over 500 million Internet users and around 860 million cell phone users. The Chinese economy is also the largest user of concrete and steel for its massive infrastructure buildup and is projected to become tops in gold consumption, surpassing India. There’s some stalling, but overall China is still tops in my view, as I discussed in Why the Great Wall of China’s Still Standing.

The country has developed into a colossal consumer of goods but you also have to feed the 1.34 billion mouths. This is astronomical when you think of how many people this is.

As the Chinese income level rises especially in the urban centers, the demand for dining out has also increased. Just take a look at our lifestyles here and you’ll understand this trend.

Whether it’s eating out or cooking at home, the investment opportunity for food-related stocks is immense in the country.

If you want to buy U.S. restaurant stocks that have increased their business in China, there are three main companies and, yes, the Chinese do appear to love fast foods.

The top restaurant stock in China is YUM! Brands, Inc. (NYSE/YUM)—the operator of well-known fast food outlets such as “Taco Bell,” “KFC,” and “Pizza Hut.”

The company has close to 4,500 restaurants spread across over 700 cities in China, adding a record 656 in 2011 and planning to add another 600 this year. In 2011, YUM! generated $908 million in operating profits from its Chinese outlets. “We consider China to be the greatest restaurant opportunity of the 21st century,” stated the company’s web site. At present, about 40% of the company’s profits are generated in the country.

YUM! opened its first KFC in China in 1987, and it currently operates about 3,700 KFCs in the country. The growth of KFC has been amazing considering that the U.S. has about 5,200 KFCs, so it looks like it will just a matter of time until there are more KFCs in China.

Launched in 1990, the Pizza Hut brand is growing in China, with about 630 restaurants in over 120 cities.

Another top fast food play is McDonald’s Corporation (NYSE/MCD), which is aiming to have 2,000 units in place inChinaby 2013.

The third up-and-coming player in China’s restaurant sector is Starbucks Corporation (NASDAQ/SBUX), which is reporting strong business despite its later start. The company opened a net 121 new stores in China and elsewhere in Asia in the fourth quarter. I see excellent potential here, especially if the Chinese increasingly shift their drinking preference from tea to coffee.

These are only three of the many investment ideas for playing the massive Chinese restaurant and food sector. There are also numerous local Chinese food companies, such as pork producer Zhongpin Inc. (NASDAQ/HOGS) and speculative seafood snack company China Marine Food Group Limited (AMEX/CMFO).