Jim Oberweis sat down with Kapitall Wire to discuss how they pick Chinese Stocks.
Jim Oberweis happily corrected the first of my many misconceptions about investing in China. I thought Chinese companies were necessarily riskier than companies elsewhere. My line of thinking was motivated by sensationalist stories like this one in the Economist that suggest China's slowing growth makes other markets more attractive. But Oberweis carefully distinguished himself from investors who invest in Chinese growth as a whole.
"We're stock pickers" he said, who follow most of the same procedures as an institutional investor would in America. "We never invest in stocks that trade over the counter…. The average market cap of our holdings is around $4 billion. We try to find companies that are entrepreneurial in nature. And we want companies that are more beholden to their shareholders than to the government."
The industries that are the focus of Oberweis's fund, the Oberweis China Opportunities Fund (OBCHX), are also not unlike the industries that would attract growth investors in America: e-commerce, information technology, and green energy opportunities. "That's where we see smaller companies as having the potential to disrupt incumbents and capitalize off the growing middle class."
It's not about "investing in China" per say, it's about finding great companies that happen to be located there. Oberweis posed a rhetorical question: "Does a great company really care if the GDP growth goes from 9% to 7%? Not really. They're going to do well regardless."
I asked him for an example. "One company we really like is 500.com (WBAI)," he said, "which actually reported earnings today that were fine. They operate as a sports lottery company that will benefit from increased penetration of online gambling by Chinese consumers. We also feel that the World Cup will drive sports lottery sales. In 2010 sales at some companies doubled."
The middle class in China is a major focus, creating inefficiencies which investors can exploit. Another major holding in the fund is China Modern Dairy (OTC: CMDKF), which makes premium quality raw milk, something that until recently not many Chinese could afford.
"I visited their farm in Mongolia recently and they have a great operation. Their margins are currently being supported by very high dairy prices. There's nothing environmental going on, there just aren't enough cows. Growing demand for high quality milk and higher beef consumption created a gap between supply and demand. It will correct itself eventually but it'll take a few years."
Oberweis wouldn't necessarily say that investing in China isn't risky. However as part of a well-rounded portfolio, the risk might be less than one would assume if you're only reading sensational articles in the press. It seemed like the major take-away from our conversation was to stop focusing on the notion of "investing in China" broadly and start focusing more on the individual companies themselves.
An important caveat though, is that you may never see a product these companies produce. Consequently, Oberweis doesn't recommend trying to pick these stocks yourself.
"You should really use a fund. I have a team in China that does due diligence on the stocks, and then I go out there several times a year to research these companies. You need to get a feel for the boards and figure out who you can trust."
We built a list of some of the stocks in the Oberweis China Opportunities fund and put them below. Would you invest in the Chinese equity market this year? Use the list below to begin your analysis and let us know what you think in the comments.
Click on the interactive chart to view data over time.
1.NetQin Mobile Inc. (NQ, Earnings, Analysts, Financials):Operates as a software-as-a-service provider of consumer-centric mobile Internet services focusing on security and productivity in the People's Republic of China and internationally. Market cap at $1.05B, most recent closing price at $18.61.
2.Qihoo 360 Technology Co. Ltd (QIHU, Earnings, Analysts, Financials):Provides Internet and mobile security products in the People's Republic of China. Market cap at $12.81B, most recent closing price at $108.38.
3.Vipshop Holdings Limited (VIPS, Earnings, Analysts, Financials):Provides Internet and mobile security products in the Peoples Republic of China. Market cap at $5.99B, most recent closing price at $114.05.
(List compiled by James Dennin based on holdings in the The Oberweis China Opportunities Fund that trade on US exchanges. Data sourced from Zacks Investment Research.)
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- NetQin Mobile Inc.(NQ, Chart, Download SEC Filings)
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- 21Vianet Group, Inc.(VNET, Chart, Download SEC Filings)
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