Theme in 2008 (Part 1)

No kidding. China as one of the theme in 2008.

I know it's a boring topic as people keep talking and talking about Olympic games in Beijing next year will boost GDP for the whole country and so on and so on......

I'm not a big fan of "Olympic game will boost economic activities". Well it will to a certain level, but it can be a one-time event only. I didn't do any attribution analysis on Olympic games to an economic system, so I cannot say it has no impact. But I think all kinds of business exhibitions together with an improving country-wide infrastructure are more important than a one-time Olympic game.

So what could happen to China in 2008 and how should we position ourselves to look for profit? Let me start guessing from the macro view.

China just finished their political meeting before end of this year. New committee members were introduced to the closed loop of authority. It almost means we can expect who could be the next president in China 5 years down the road. I don't expect any dramatic change in the government body, so China should be politically stable in 2008.

It's hard to say if their fiscal and monetary policies can work out well on controlling inflation and trade surplus and even the appreciation of currency, but given that the government is quite pro-active in controlling the economy, I'm not surprise that the Chinese government will act quickly and aggressively to solve any economic problem.

But there's only that much human beings can do, so China is still facing tough challenge ahead. My guess on the overall China stock market is continued to be volatile, and in the meantime I'm slightly bias to the downside. If inflation really becomes out of control, expect larger movement from the government and watch out from the downside.

Notwithstanding, I believe there are still strong stocks can hold their grounds and possibly move up to take the lead. Below I'll focus on ADRs which we can buy here in North America.

Baidu - I guess we are now in 2008 and we cannot ignore Chinese tech stocks. Baidu as the most famous search engine in China surely has the potential to move on and expands itself. Although China is still considered as emerging market by measures of governance and transparency, but the size of its market is enormous compare to any emerging market country. So if Google can grow to become a $200 billion company I don't see why Baidu cannot. I don't expect Baidu to become a $200 billion company in 2008 (currently it's about $13 billion), but double in size is possible. To be conservative given the possible challenge in China next year, a 50% increase is reasonable. I expect Baidu to close 2007 at around $350. So my guess is it stands a chance to reach $525. The worst case in the meantime I can think of is about $300 then $225 (unless the CEO of Baidu is a criminal and the whole firm just collapses).

Focus Media - Well I already put my money where my mouth is. Focus Media has an almost monopoly ad market in Chinese malls, elevators and etc (except airports). With several acquisitions they made in 2007 they will only become stronger, and hopefully the profit margin numbers as well. Again I hate to use Olympic game as the excuse, but if anyone would like to reach the public during Olympics by commercials Focus Media almost is their only choice. I will not be surprise that Focus Media will charge them more during Olympics, as it's just like TV station charges more on commercials that show in peak hours. My guess in 2008 is FMCN could reach a 50% return, approximately to $80. Downside is $50, then $40.

Ctrip.com - I like it because it's still small and consistently making money. They are the expedia in China, and they are by far the largest. With Chinese people having more and more money to spend, travelling definitely is one of the big thing they will do. Don't make me to tell you the Olympic story again. My guess is a 50% return to about $90, downside is $52.5 then $45.

Netease - Netease is not the biggest online game company in China, but they just kicked start their own search engine called yadao. Will it be a success I don't know now, but having a new revenue stream without a need to invest huge capital I won't say why not? You can imagine this company can approve $100 million to buy back their own shares and at the same time getting revenue from new type of business. Even something can go wrong but it won't kill them. As i have mentioned in some of my previous blog it didn't drop below the 200-day EMA even they reported so-so earnings. I think in the meantime it found a bottom and building up from there. So, my guess is a possible 50% return to mid $30's, if they report good growing revenue in their search engine, a double is possible too. Downside is $19, then $16.

China Digital TV Holdings (STV) - The problem of STV is it's an IPO. Generally I'm scare about IPO as there is not much trading history. But STV is kind of the biggest player in this area so I guess I cannot totally ignore it. China is such a volatile and immature market so I prefer to pick the leader of the industry. Do not try to pick anything other than the leader, unless you dig pretty deep into that company. You never know what can happen to these Chinese company. My guess is a possible 100% upside and 30% downside.

China Mobile - Again I like the pick the leader only. I don't mean there is no value in CHA or CHU, just that picking CHL I guess I can sleep better. But since CHL is pretty big already, so I guess one should trade in and out with CHL instead of just holding it. If you catch at the right moment I guess a 20% every time you trade is possible. At the least if you think you get in at the wrong time, you have much better confidence to hold it longer.

China Life - LFC in this case is even stronger than CHL, because insurance company is too important to an economy and I believe if anything goes wrong, the governemnt will not let it dies. LFC is quite big as well so one should try get in and out to seek the 20% return.

Finally, do not ignore FXP. This is by far the only chance you can play the downside of China. It is not for long term but if you can make good use of FXP, I'm sure you will love the person who brought it to the market. Just that it is very gappy and you have to play it with confidence and cautious.