Investing in China – Where to Start?

Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

China has just celebrated its New Year – the year of the Snake. This country has also reached a milestone as it eclipsed the U.S in terms of total value of trade balance: in 2012, China's total trade balance was $3.87 trillion compared to $3.82 trillion for the U.S. These figures are very close but they represent part of the ongoing shift towards the Chinese economy. This country still has a long way to go until it will reach the importance of the U.S – China's GDP is nearly half the GDP of the U.S. Nevertheless, the high growth of China's economy is keeping this country as an opportunity worth exploring.  The growth in China and other leading countries in Asia are reflected in the growing revenues of many U.S companies that operated there. The financial risk is likely to be lower in investing in a U.S company than directly investing in Asian markets or companies. Let’s examine several companies that already operate in China and other leading countries in Asia so that these companies make it possible for investors to benefit from the growth in these countries. 

Caterpillar (NYSE: CAT)

This company is expected to augment its business in China in 2013 on account of the decision made by the Chinese government to spend over $150 billion in infrastructure projects in the coming years. The rise in China's expenditures is likely to reflect in an increase in Caterpillar revenue. According to the yearly reports of 2011, by 2025 nearly 966,000 km of new roads will be paved and dozens of transit systems and airports will be built in China. Despite these positive projections, based on the recent dealers report, Caterpillar's machines retail sales declined in Asia/Pacific by 7% during December 2012. Furthermore, investing in China has its perils that should be taken into account: Caterpillar's purchase of Siwei, a company known for producing mining roof support equipment, proved to be less attractive than it was first projected, as the accounting misconduct in this deal led Caterpillar to add a goodwill impairment provision of $580 million in the latest quarterly report. So even though the company's business in China/Asia has positive projections, there are perils worth considering.    

Philip Morris International (NYSE: PM) 

For Philip Morris the Asian region is leading all regions in terms of revenues: the revenues of company reached nearly $11.2 billion in 2012. The growth in sales was around 4.6% (year-over-year), which is only lower than the yearly growth in revenues in the EEMEA region (at an annual growth of 5.7%). The operating profit margin in the Asian region is also the second highest only to the European Union. This puts the Asian market among the top in terms of profitability and growth for this company. Philip Morris is likely to further grow its business in Asia including in Japan, Indonesia, China, and Korea so that one could benefit from this growth that will reflect in the company’s stock price.

Starbucks (NASDAQ: SBUX)

This company business development in China/Asia was impressive as Starbucks revenues grew by nearly 31% in the fiscal year of 2012.

In China, the company expanded the number of stores by 130 in 2012, which is second only to the U.S with 161 stores. The number of stores in China is still below the U.S, Canada and UK, but at the current growth, China is expected to pass Canada and UK within 5 and 1.5 years, respectively.  Moreover, the operating profitability in China/Asia is around 35% compared to 21% in the Americas and 0.9% in the EMEA. This is another indicator that Starbucks is harnessing the economic growth in China that is reflecting in the company’s growth. And since the profit margin is higher than other regions, this makes the investments in such a region beneficial.

I won’t dare to claim that these companies are the only ones or the best worth considering if you wish to raise your exposure to China and other countries in Asia. But these companies are from very different industries and their success in the Asian market varies. This should give you a sense that with reward there is always risk that could jeopardize your investment. But these companies are a good starting point to consider when examining the Asian market.

For further Reading see: Why Caterpillar isn’t Rising? Just blame Oil

Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.


liorc has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Philip Morris International and Starbucks. 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!

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