Author: James Hofmann
Covestor model: Greater China
Disclosure: Long TSL, CHL, SOHU, SNP, CMED
If you just started following my China Value model, I wanted to spend some time telling you what it is about. The model seeks to invest in and take advantage of opportunities in the greater China region. China is experiencing rapid economic growth, propelling the nation into the center of the world stage. This model will own equity in Chinese companies through ADRs and U.S. listings. I view this as a generational opportunity, the chance to get in on a rapidly growing and changing capitalist society with over a billion consumers. It is much like investing in America one hundred years ago and who wouldn’t want that opportunity again?
The model will follow time-tested strategy of value investing. We will start by looking through a macroeconomic lens for industry selection and move down to company valuation for individual stocks. Most of the stock analysis will be relative comparisons once a sector is chosen, however balance sheet and cash flows will also be examined. Stocks will be examined for trend analysis and to assess discount to fair value. I view this value model as one of the best risk/reward investment options in China. Overall, the model will be conservative in nature yet also aims to gain from the economic growth in China. Our bias will be toward smaller and medium sized companies with the most room to grow in their sector.
For the next few months, my focus will be on the Chinese consumer. I want to be long companies whose products China’s growing middle class can buy. So we will be long consumer discretionary, technology, and medical sector companies. Energy is also very appealing as those companies will have a huge market to serve. In particular, China’s growing solar panel manufacturing sector offers some opportunities. I believe when panels become popular they will be made in China. That is why I have a conviction-buy sized position in Trina Solar (TSL), which offers rapid growth at a value price, the likes of which are rare in developed markets.
There will be some re-balancing over the next few months as I try to get the model optimized. I’m hoping to take advantage of short term opportunities while we seek to find and settle on long-term winners. I will keep putting out my reports monthly, so please keep checking back.
Other holdings in the model so far:
China Petroleum & Chemical (SNP)
China Mobile (CHL)
China Medical Tech (CMED)
Sohu.com (SOHU)
