This Is Still a Great Place to Invest

When I tell people I'm buying stocks in China, I get shocked stares. After all, successful short-seller Jim Chanos is publicly proclaiming the demise of China's housing industry, while 92% of real estate investors in China remain bullish on property prices. If ever there were a clearer divide between the smart money and the dumb money, I haven't seen it.

Given those circumstances, why am I still buying Chinese stocks?

It's a good question
Investors should not consider China one giant market monolith. In fact, it's home to at least two very different investment environments. The first is tier one China. This is the China that's covered every day in the papers, the China that's home to such architectural monuments as the CCTV Tower in Beijing and the Oriental Pearl in Shanghai, and the China that gives us giant state-owned enterprises such as PetroChina (NYSE: PTR  ) and hot consumer and Internet stocks such as China Finance Online (Nasdaq: JRJC  ) and Baidu.com (Nasdaq: BIDU  ) .

This China is expensive -- perhaps even bubbly -- and I am avoiding it like the plague. But there is another China that remains ripe for investment opportunity, and while I first told you about it months ago, I suspect many of you did not take my advice.

You had your reasons
If investing in China takes a leap of faith, then investing in the China I want you to consider may make you reread your Soren Kierkegaard. That's because I want you to move from tier one China into tier two, three, or even four China, where the people are poorer, the companies are smaller, and the track records are shorter.

Why would I ask you to consider this seemingly outlandish shift in strategy? Because by doing so you will get cheaper stocks, faster growth, and more sustainable economic tailwinds.

A story you may have missed
A big story in China recently was the release of the government's first policy document of 2010. Known as the No. 1 Central Document, this annually details the issue the Chinese government will focus on most in the coming year. What is this year's priority? For the seventh year in a row, it's to continue to develop rural areas in China and raise rural incomes. According to the China Daily newspaper, this will mean investing more in farming, expanding rural pension and health-care systems, and subsidizing the expansion of agricultural infrastructure.

Now, the government has already been at this for a while, and as I wrote back in June, this is why rural China is the fastest-growing part of the country. Yet, unlike stocks in tier one China, rural China stocks remain relatively cheap -- with tier one P/Es at 17 against just 13 for the rest of the country. This is why rural China is still a great place to invest.

What to do about that
Back in July, we introduced our China Rural Boom basket of stocks at Motley Fool Global Gains in order to make money from this startling discrepancy between our outlook for and the market's valuation of rural China. The basket included two small plays in China's agricultural sector, two plays on the rural Chinese consumer, and one megamultinational with a clear China strategy to balance out the risk profile.

Our investing thesis is that a variety of subsidies and incentives will enable Chinese farmers to not only purchase items such as fertilizer, seeds, and equipment, but also become consumers of more discretionary items such as household appliances, mobile phones, and prepared foods. Thus, you might correctly guess that Coca-Cola (NYSE: KO  ) -- the aforementioned megamultinational -- and China Mobile (NYSE: CHL  ) are two components of our rural China basket.

These are both well-run companies with strong cash flows and established brands in China. Further, in the case of China Mobile, we believe that while new offerings from China Unicom (NYSE: CHU  ) and China Telecom (NYSE: CHA  ) have made tier one markets in China markedly more competitive, China Mobile continues to dominate rural areas. While this will depress the company's average revenue per subscriber in the near term, a mass of loyal rural subscribers should generate significant long-term value for the company and its shareholders -- value that the market is currently underestimating.

How it's doing so far
Our basket of five rural China stocks is already up more than 50% overall, but given the growth that I expect to take place in rural China in 2010 and beyond, it still has room to run. This is why investors shouldn't be avoiding or shorting China outright these days, but rather focusing their exposure on rural China -- the fast-growing part of the country that most investors and the media are both ignoring.

You already know two of our rural China picks, both of which we're firmly behind, but I encourage you to join Global Gains and read up on the other three. Click here for more information.

Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. Baidu.com and China Finance Online are Motley Fool Rule Breakers recommendations. Coca-Cola is an Inside Value selection. The Motley Fool owns shares of China Mobile. This is the Fool's disclosure p-to-the-o-to-the-l-i-c-y.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 14, 2010, at 12:19 PM, langco1 wrote:

    the depression in the US is so bad that kids need to eat at school.1 in 8 americans are now collecting food stamps.this is how the foolish people who voted for obama have been paid back and its only the begining...

  • Report this Comment On February 14, 2010, at 12:39 PM, RanchBurger wrote:

    China Telecom is one land line phone service available all throughout China. They even offer coverage to rural areas. They have thirty one offices and provide telecom support nationwide. This company would be the first one to check with when hooking up or installing your land line.

    China Unicom started as a mobile phone company that also offered Internet access. They are also listed as offering land line communications in some areas. They offer a variety of services. From mobile phones to DSL connections.

    There are twenty mobile companies to choose for your mobile phone service. Each company offers different rates, discounts, packages, and features. They also have their own service areas and ranges, so the first thing you will need to know when looking into these companies is what area of China you will be utilizing the most so you know which company will best meet your needs.

    The following companies offer a mobile service in China: China Mobile, Vodafone, Telefonica, American Movil, Telenor, China Unicom, T-Mobile, Telia Sonera, Orange-France Telecom, Bharti Airtel, Reliance Communications, Verizon Wireless, Singtel, AT&T Mobility, MTN Group, Telecom Italia, Etisalat, Orascom Telecom, NTT docomo, and Eclipse Mobile.

    China Mobile is the largest mobile phone company in China. China Mobile has over 415 million customers and services a large portion of China. The flagship brand is Go Tone which is a post paid plan with various subscription options. M-Zone is the prepaid service they offer, which carries most of the features and options as the Go Tone. Easyown is the basic service and the most popular service they offer.

    According to numbers, Vodafone is the second leader with 289 million subscribers to their service. Vodafone is based in England and owns 45% of Verizon Wireless. They are constantly growing and expanding into new areas. They have developed a high reputation as a global leader in mobile services. They should be one of the companies looked at when purchasing a mobile phone connection in China to see if they offer service to your area and what plans they have available.

    There are also five satellite based companies. These are: Globalstar, Thuraya, Iridium, Immarsat, and ACeS.

    -------------------------

    www.topinvestingtips.com

  • Report this Comment On February 15, 2010, at 2:11 PM, langco1 wrote:

    obama who has been nothing more than a figurehead for the democratic party from the start needs to be replaced.the US is in its second year of a depression with 1 person out of 8 collecting food stamps.many kids need to go to school in order to eat.20% of the workforce is already unemployed.rising bankkruptcys,forclosures,inflation and energy prices are pushing the country toward a major collapse.its time for a midterm election to bring in someone who is more interested in running the country than trying to be a small time celebrity...

  • Report this Comment On February 15, 2010, at 9:44 PM, TMFMmbop wrote:

    RanchBurger...you are talking straight nonsense: http://en.wikipedia.org/wiki/Telecommunications_industry_in_...

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