The Future of China Investing: Beer, Gambling, & Children
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Prior to joining Global X Funds, Alex Ashby lived and traveled extensively throughout Asia. He currently manages a group of six ETFs covering the consumer, energy, financial, industrial, material, and technology sectors of the Chinese economy. The Global X China Consumer ETF (CHIQ) provides investors with exposure to consumer-focused companies in China and is designed to be a transparent, cost-efficient way to get access to the growing consumer demand within the country.
[continued from “From HOG to HOGS: The Chinese Consumer Buffet”]
Nick Slepko: Of course, the ETF assumes growth through out the Chinese market, but which areas do you see growth in particular?
Alex Ashby: One area where you will see more expansion is on the travel and leisure side. Some of these airlines like China Southern Airlines (NYSE: ZNH) are aggressively expanding – and not just in China, but regionally. Currently, about 28% of China Southern’s capacity is in regional markets (which included Hong Kong,Taiwan, and Macau) with the remainder being domestic. The company has stated a goal of reaching 30% for international markets, and is also establishing hubs in Western China to create links to Russia and west Asia. There is going to be a lot more trade and interaction around the region.
Home Inns & Hotels Management (NASDAQ: HMIN) is another play on growing domestic travel within China, with the company operating over 1,600 economy hotels throughout the country. This is a company you would expect to benefit from the same trends as China Southern Airlines, but obviously operates in a very different industry with unique economic characteristics. What makes the China Consumer ETF interesting is that it allows you to express an investment idea that isn’t necessarily tied directly to the fortunes of one company or industry – it helps balance out both sector and company-specific risk in that sense.
Slepko: What about Tsingtao Brewery (NASDAQOTH:TSGTY)? China Resources is not only bigger and more sophisticated, but has a lucrative arrangement with international beverage titan SABMiller? Why is Tsingtao so well known, and is it a company that will buy others, or will it be one that gets bought?
Ashby: I think the main reason is that if your main product and company name are one in the same it helps with familiarity among the public – and that includes investors…China Resources has a larger presence in our ETF [~4.9%] because it has a larger market cap than Tsingtao [~3.6%], and with all the consolidation in the industry Tsingtao could be a potential target – not necessarily to be acquired outright, but we have already been seeing international companies taking large stakes in companies like Tsingtao. Any acquisitions or investments Tsingtao is likely to make are going to be smaller, local competitors. Tsingtao is probably the most interesting option for foreign operators looking to break into the Chinese market.
Slepko: If Tsingtao returned to being a German company (or Asahi or Anheuser decided to take it back), would it still be included in your ETF?
Ashby: If it became part of another company listed somewhere else that does not have its main business operations in China, then no. A foreign acquisition would most likely cause the company to fall outside the index guidelines.
Slepko: Why is Chinese online video behemoth Youku Tudou included in the [Global X China] Consumer ETF and not in the [Global X NASDAQ China Technology ETF (QQQC)]?
Ashby: There are probably arguments to be made as to why Youku Tudou could be in one Fund or the other – or both. There is of course an Internet and technology aspect to the company, but it is also meeting strong consumer demand for its content. As a passive ETF manager, these classification are ultimately up to the index provider, who must determine whether certain companies fit the criteria for the fund and if they should be included.
Slepko: With global mega-casinos receiving a high-percentage of their revenues from China (Wynn ~70%, Las Vegas Sands ~50%), why aren't they included in your ETF?
Ashby: Those companies wouldn’t fall under the index guidelines. The “Selection Pool” includes those companies which have (a) a legal domicile and/or their main business operations in China, and (b) listed on a regulated stock exchange in the index country in the form of shares tradable for foreign investors without restrictions. You could maybe make the case that “revenue” and “main business operations” could be basically the same thing, but I think the definition in this case means the corporate headquarters. So, Wynn and LVS wouldn’t meet the criteria.
Slepko: After water, legendary investor Jim Rogers has said that investments in for-profit education in China will end up making quite a few people rich. In fact, James Tooley of the University of Newcastle has not only done research, but taken a crack at providing fee-based private education options to the poor in China. Do you think something like New Oriental (NYSE: EDU) will be able to out compete with the educational initiatives that Disney (NYSE: DIS) has launched in their drive to capture the Chinese children’s market?
Ashby: I think the big distinction here is that Disney currently has the primary goal of teaching English – and only English – to children in China. New Oriental, on the other hand, provides a comprehensive range of educational services and a full primary and middle school education. The company does have special programs for teaching English that may see some competition from Disney, but New Oriental is involved in a wide range of subjects and areas where Disney has no particularly expertise and most likely won’t look to compete.
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney and New Oriental Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!