Why China Bears Are Dead Wrong
Stock-Markets / Chinese Stock Market Nov 10, 2014 - 10:42 AM GMTBy: Money_Morning
William Patalon writes: When Gannett Newspapers posted me to China in 1997, the Pudong area of Shanghai was just beginning its transformation from swampy farmland and ramshackle wharves into a thriving financial district. Today it's one of the world's key financial centers, home to more than 5 million people, one of the world's tallest buildings and an international airport.
When Apple Inc. (Nasdaq: AAPL) shopped for a site for its first Shanghai Apple store, it chose a spot in Pudong.
The Pudong "experiment" has done so well, in fact, that Pudong has emerged as one of China's real financial anchors. Indeed, The Wall Street Journalrecently wrote that "today, as worries of a China property crash are back in force, there is an unlikely bright spot: Pudong."
Since 1990, the amount of surface-area construction that's taken place in Pudong is the equivalent of two Manhattans. And while Pudong was conceived as an international gateway, it's actually become a model of how development should take place, as China's economy shifts from one focused on exports to one being driven by domestic spending.
It's nothing short of miraculous…
I think about the "Pudong Development Miracle" whenever I'm making an investment case for a China-related investment.
The whole "Invest in China" thesis gets tougher and tougher to make. The "experts" keep talking about all the challenges – a property bubble, credit issues, or the economic "bloat" of so-called state-owned enterprises (SOEs) – that are destined to bring down the Red Dragon.
There are issues, to be sure. But those issues are more than offset by a $10 trillion economy that's expected to keep growing at a 5% to 6% rate for the next decade.
Two developments bring the Pudong story to mind.
The first was this week's earnings report by Alibaba Group Holding Ltd. (NYSE: BABA) – the Chinese e-commerce giant's first as a U.S. public company.
And the second was a superb panel discussion in the most recent issue of Barron's.
Let's look at them both.
These Numbers Are Incredible
On Tuesday, Alibaba said revenue for its fiscal second quarter reached $2.7 billion, a gain of 54% from the year before and a result that exceeded Wall Street's forecast of $2.6 billion. The company earned $0.45 per share – a result that met expectations.
Some analysts – such as JG Capital's Henry Guo – noted that Alibaba's profit margins were thinner than expected. But those who understand what Alibaba is trying to do see that the company is in the "building" phase, meaning founder Jack Ma is putting growth ahead of profitability. Indeed, if you drill down a bit into the earnings report, you'll see that Alibaba said it heavily boosted ad spending to promote its online "marketplaces" in its home China market.
Alibaba's marketplace platforms – which include the popular Taobao and Tmall e-commerce sites – account for about 80% of online shopping in China. Online spending is projected to be three times its 2011 size by the end of next year.
At this juncture, we totally agree with Alibaba's long-term view: Growth grabbed now will translate into even higher profits down the road – meaning the "long view" is also the correct view right now.
We're already seeing the payoff: Alibaba had 307 million annual active buyers on its retail marketplaces at the end of September, a year-over-year jump of 52%. To give you a bit more context, we're talking about a gain of 105 million users – a number equal to one-third of the entire U.S. population.
And Alibaba is focusing on mobile, a transition that's still very much underway in the China market.
The company said it added 91 million active mobile users since the same quarter last year. And it's cashing in on those customers, with mobile revenue soaring more than 1,000%.
This is why we continue to say that Alibaba is "the next Wal-Mart" – and offers today's investors the same profit opportunity that Wal-Mart Stores Inc. (NYSE: WMT) offered when it went public back in 1970. And Ma is clearly already looking to the U.S. market.
Alibaba just went public in September. With the emergence of its middle class, China is right now where the United States was in 1970 – which is when Wal-Mart had its initial public offering (IPO).
If you bought 100 Wal-Mart shares at the IPO – an outlay of $1,650 – and held them until today, you'd now have 204,800 Wal-Mart shares. The stock closed Friday at $77.32, meaning that your original $1,650 outlay would now be worth just a bit less than $15.84 million.
That's right: You'd be looking at a $15 million profit – and a gain of 959,729.33%.
We believe that Alibaba offers a similar long-term opportunity.
And that brings us to the Barron'spiece.
Alibaba and China Are Playing a (Very) Long Game
In the weekend report "The New World," Barron's assembled a panel of four emerging-markets experts, including Justin Leverenz, who runs the top-performing $42 billion Oppenheimer Developing Markets Fund (MUTF: ODMAX). Today we'll focus on the panel's observations on China's market (and several other markets in my Private Briefing).
Many investors are obsessing over the potential for a Chinese property crash. But Leverenz says those doomsayers have the wrong perspective.
"Some investors are mistakenly using the U.S. housing bubble as a playbook," Leverenz said. "While there was a speculative component to the Chinese real estate boom, price increases were largely a result of property-market reform and strong underlying demand for new homes, and the leverage used to buy property was nowhere near the scale used here. I'm not dismissing the possibility of excesses, nor saying there won't be significant problems with credit and banks, but this is a side story to an economy that's $10 trillion and growing 5% to 6% annually for at least the next five to 10 years."
Indeed, when it comes to China, there are reasons to be bullish, Leverenz said. Wages have risen, but productivity has more than offset those expense increases. At the same time, deregulation and reform has opened up such key sectors as healthcare, railroads, banking, and energy.
What we've been telling you folks all along is that you need to focus on the long term. And that's what Leverenz said, too.
"I'm a long-term investor, and I'm interested in a narrative, not headlines – and the biggest narrative is the reform in China, which involves changing historical policies that have been extremely egregious to land and labor; corporate-governance policies," he said. "We have had a wonderful decade with no big crisis, no significant inflation, and above-average growth. From a growth perspective, hands-down the winner has to be Asia. They have productivity and savings to fund growth, in part because social and educational mobility is better than in most other developing markets. Consumer and government savings haven't changed in places like Turkey and Brazil."
How to play it: With Alibaba, look to put some shares away for the long haul. And add to the position if the share price should decline.
Source : http://moneymorning.com/2014/11/10/the-china-bears-are-dead-wrong/
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