What’s a Wumart?
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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 (NYSEMKT: 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.
Nick Slepko: The Consumer ETF has been the most popular of your China ETFs in terms of average trading volume, assets attracted, and most every other measure. Why?
Alex Ashby: It’s definitely the story that investors are most familiar with and is reinforced by what people read and the common perception on China. Plus, it’s what you hear from the leadership in China as they focus on making the transition from an export-oriented economy to a consumer-demand driven one where consumption is at a certain level where they don’t have to be totally dependent on exports for their growth. All the important pieces and forces are there to promote consumption, and for a lot of investors it’s often about their time horizon and comes down to more of a question of “when” than “if” at this point. A recent report from the Boston Consulting Group predicts that affluent consumers in China will reach 280 million by 2020, or 20% of China’s population – so the trends are definitely in place for growth. A lot of people are thinking the recent change in leadership will be a catalyst that promotes the consumer – and other areas of the economy as well.
Slepko: How do you envision the leadership change happening?
Ashby: This once in a decade change is a gradual process that will unfold over the next few months. The new leadership is coming in at an almost natural transition point in the economy with the recent under performance and the issues with state-owned enterprises and subsidies for industries that may need more competitive exposure. I think it is definitely a great opportunity to start making these types of reforms. There is also some talk of further stimulus, but in the medium and longer term it is about the language used to talk about reform.
Slepko: Conventional wisdom says we should prefer owner-operated companies. With a country it may be a bit different. Do you think any of these new leaders would be ones talented enough to run any country or are we just hoping for the least worst from what’s available?
Ashby: There definitely seems to be a lot more reform-minded individuals, and corruption is not a new issue, but these might be the ones to tackle these issues – which is a major theme that the outgoing president recognized in his recent speech.
Slepko: Looking over the forty stocks of the consumer ETF, certain names stick out – what is a Wumart (NASDAQOTH: WUMSF)?
Ashby: Essentially, it is a convenience store operator that has items on the staples side, Procter & Gamble, Unilever-type products.
Slepko: Clearly, by every metric Wumart is no where near Wal-Mart (NYSE: WMT), but do you see any of these Chinese consumer companies becoming globally competitive?
Ashby: It is definitely possible. You are seeing other emerging market companies making the transition, but this typically starts out with regional expansion first. One example that comes to mind is Shoprite Holdings (NASDAQOTH:SRHGY), which is the holding company of South African supermarket chain ShopRite. This is a company that originally focused on expanding within South Africa, gained significant share in that market and is now looking at regional opportunities – it is opening new stores in Nigeria and Ghana, and has already expanded its current footprint to more than 100 stores in 16 countries within Africa. Expansion outside Africa could be in the future for ShopRite, but at the moment the strategy appears to be focusing on high-growth opportunities in local markets where they have regional expertise and an understanding of both the regulatory environment and the consumer. Many of the companies in China appear to be taking a similar approach, which makes sense because many of the growth opportunities are in their own backyard, and in countries where they may have a competitive advantage against the Wal-Marts of the world.
A lot of these companies [in the ETF] are relatively young. Wumart was only founded in 1994 – putting that into perspective, Wal-Mart was founded in 1962 and ShopRite was founded in 1979. While globalization has allowed regional and international expansion to take place much more rapidly now, Wumart is still in early stages and presumably their primary goal is to expand in China and the cities it currently is in now.
Slepko: Last year, advertising titan Focus Media Holdings (UNKNOWN: FMCN.DL) had serious accusations of fraud leveled at its reporting and other publicly released information. How do good Chinese companies overcome the perception that taints them all?
Ashby: Focus Media Holdings is an interesting example, because this is a case where the accusations of fraud appear to have been either unfounded or at least overstated to some degree. Immediately following the accusation, Focus Media came out with a vigorous defense of its practices. The stock dropped right after the release of the report, but since that time the stock has gained nearly 60% - which appears to be an indication that the accusations haven’t stuck. Hopefully, moving forward we will see more examples like this and the overall trend will be for more transparency and higher degrees of investor protection.
[continued in “From HOG to HOGS: The Chinese Consumer Buffet”]
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. 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!