Monday, Nov. 17, 2003

Getting a Piece of the Action

By Aravind Adiga

Is it too late to cash in on China's boom? An index that tracks the stocks of mainland companies listed in Hong Kong shot up 85% this year, leaving Chinese stocks looking more expensive than they have been in years. But the most celebrated of all foreign investors in China thinks the country's potential has barely been tapped.

Mark Mobius, a mutual-fund manager for U.S. investment company Franklin Templeton, became interested in the mainland 30 years ago, when the only way to invest was through deals at the Canton trade fair. Making a China play is simpler today. The Mobius-managed Templeton China World fund, which buys shares of companies operating in China, Hong Kong and Taiwan, has risen 50% over the past year, and Mobius is counting on the good times continuing. "The economy is at a take-off stage, with 7-8% growth, and a rise in per capita income," he says.

The best way to play China is through so-called H shares, mainland companies listed in Hong Kong. They "offer their shareholders the best management and disclosure," Mobius says. Another favorite of overseas investors are "red chips"—Hong Kong-based companies in which mainland entities are significant shareholders. Focus first on firms dealing in commodities, which are essential raw materials for China's fast-growing industries. Mobius has invested in Sinopec (China Petroleum and Chemical Corp.), which makes petrochemicals and drills for oil and gas. He also recommends companies whose growth is being fueled by China's consumers, such as China Mobile, which has the world's largest mobile-phone subscriber base, and China Travel, a travel-service giant.

Mainland stocks might be riskier than other investments, in part because the Chinese government often has significant ownership positions in the country's listed companies. Should it sell down its holdings, share prices could tumble. Risk is one reason Todd Henry, an analyst with mutual-fund company T. Rowe Price, suggests taking the indirect route. Henry recommends investing in multinational companies that have fast-growing mainland operations or will otherwise benefit from the mainland boom. One example: Impala Platinum, a South African supplier of platinum, which will gain from mainlanders' growing desire for jewelry. Marc Faber, a Thailand-based investment strategist, thinks China's middle-class citizens will spend more time traveling in Asia. He suggests investors keep an eye out for shares of tourism-related companies in countries such as Thailand and Vietnam.

Profiting from China without getting burned is currently an obsession with the international investment community. A recent report by investment bank Merrill Lynch suggests an ingenious solution. "Japan is becoming a China play," the report says, pointing out that Japanese investment and manufactured goods, once headed for the U.S. and Europe, are now going China's way. The report concludes, "Rather than try and play China directly, maybe we should start to focus on who in the West would benefit from less competition from Japan." While the boom lasts, it looks like all the world's a China play.