Three plays on the rise of China

Soon, China will no longer just be the factory behind other countries' brands, it will develop its own. And it will only be a matter of time before they are in the mainstream. Here, fund manager Fen Sung picks three companies he thinks we will become a lot more familiar with in the future.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Fen Sung, investment manager at the Premier China Enterprise Fund.

Every day now we depend on brands such as Samsung, HTC, and LG. But I bet many people still think these brands are Japanese. In fact, they are Korean and Taiwanese. Similarly, China will soon no longer just be the manufacturing workshop behind other countries' brands, but will develop its own.

Indeed, French electrical firm Schneider recently paid $23m to a Chinese equipment manufacturer to settle a patent lawsuit. This is symbolic of China's rapid progress normally we've seen foreign firms suing Chinese companies for patent infringements. Chinese white goods manufacturers, such as Haier Electronics, have started to sell their products in Argos. For now, we may prefer more established brands, but it is only a matter of time before China's go mainstream.

Another key theme is the future of the renminbi. When China de-pegged its currency from the US dollar in 2005, it strengthened by around 17% and has hovered around this level for the past year. But that early appreciation does not suggest Beijing wants the dollar to weaken further remember they still have $2 trillion in foreign reserves and the US is a major trading partner.

My view is that the Chinese want the renminbi to gradually become a fully floating currency. However, their financial system is not yet sufficiently mature to handle this. So, we will continue to see merger and acquisition activity within the more advanced Hong Kong banking system China Merchants Bank's acquisition of Wing Lung Bank last year was evidence of what is to come.

This leads me to my first stock pick Dah Sing Financial (HK: 0440), one of Hong Kong's smaller banks. The bank is currently trading below book value. This makes it a prime takeover target. It may also get the opportunity to write back some big accounting hits to profit, made to reflect recent mark-to-market losses.

Millions of migrant workers have lost their jobs due to the manufacturing slowdown. To help avoid social unrest, China has been promoting agriculture and land ownership. As well as improving China's food security this should reduce unemployment. Hence my second stock pick, China Blue Chemical (HK: 3983), the leading manufacturer of fertiliser. I favour this stock as it benefits from a strong parent company which provides its feedstock at competitive prices.

The fact that China Mobile, the world's largest mobile phone operator by subscribers, recently acquired a 12% stake in Taiwan's Far EasTone shows that China plans to leverage off Taiwan's expertise in manufacturing and brand building. Indeed, the evidence of this trend is everywhere. For example, for the first time in six decades, you can now fly direct from China to Taiwan, without having to detour via Hong Kong. This is true for shipping as well.

Just as, at a global level, the East is unable to decouple from the West, so Taiwan cannot decouple from China. So my final stock pick is a Taiwanese company HTC Corp (TAI: 2498), one of the world's leading smart phone manufacturers. HTC is currently trading at a forward p/e of 12.5. It has net cash, and a yield of over 5% makes it a very attractive proposition. I see the strong growth in smart phones continuing, as mobile email and the internet are now a way of life in Asia and around the globe.

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The stocks Fen Sung likes

12-month high12-month lowNow
Dah Sing FinancialHK$13.86HK$3.34HK$9.56
China Blue ChemicalHK$5.38HK$2.23HK$4.36
HTCTW$615TW$256TW$474

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