With all the hoopla, hype, and colored balloons surrounding Chinese IPOs in U.S. markets, a great deal of debate is swirling as to whether the Chinese economy is overheated or inflated to the point of bursting. Regardless of the answer, the frenzy equates to added risk on top of an already extremely high degree of risk.
Look at the wild popularity of recent Chinese IPOs, such as Linktone (NASDAQ:LTON) and Tom Online (NASDAQ:TOMO). Investors who would normally scoff at investing in a company selling something like ring tones are snapping up shares. Granted, Chinese consumers love their cell phones, but come on. Ring tones?
Most of the Chinese companies, available via American Depositary Receipts (ADRs) on U.S. exchanges, are either turn-of-the-19th century industrial age companies such as rail, steel, coal, and energy companies, or turn-of-the-20th century information age dot-coms, with little in between. Furthermore, little information from which to perform even a modicum of due diligence on nearly all of the Chinese choices is available. It's just as well, most of them are largely state-owned.
This kind of blind investing is similar to backing an Old West gold rush claim, sight unseen. But there are ways to profit from growth in China without taking on this magnitude of risk. A number of companies are making significant portions of their revenues by selling goods to China. And, there are companies that are profiting indirectly from demand for goods and resources in China.
Schnitzer Steel Industries (NASDAQ:SCHN), for example, derives a large percentage of its revenues from hauling scrap steel to China. And huge demand for copper in China has helped to drive up shares of Phelps Dodge (NYSE:PD) 150% during the past year. Another example is small-cap tech company UTStarcom (NASDAQ:UTSI), which sells networking equipment to Chinese wireless and wireline telecom companies.
Plenty of good companies exist right here in the U.S. that are profiting from China's tremendous economic growth. It makes me wonder why anyone would give in to the temptation of "hot" Chinese IPOs, with all the added risk and lack of transparency that comes with them.
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Fool contributor Mark Mahorney doesn't own shares of any companies mentioned.
