“Deep-Sea Eel Pizza with Robert Hsu”

Time escapes the Gumshoe today, so we’re going to have a look at a quick email I got from Robert Hsu late last week.

Hsu’s ads for his China Strategy service tell us that the key to his success is understanding Chinese consumers and what they want, and understanding how China is different. He believes he has that understanding because of his “boots on the ground” research crew, his own heritage and language skills, and his frequent visits to the Middle Kingdom.

I can buy that, I suppose — though I think the importance of “boots on the ground” has a tendency to be overstated by some newsletter editors and analysts who enjoy travel junkets … and there’s always the risk for analysts who visit companies in person that they can get infected with management enthusiasm. But in the case of China or other places where corruption is rampant and accounting is not necessarily always reliable, I can see how the personal visits and experience can be a benefit. And I know many of my readers really like China Strategy and subscribe, though I don’t know if he has as many fans now as he did when China stocks were almost universally on fire (he did advise caution to his subscribers last Fall, from what I hear, though I don’t know the specifics).

But the point is … Hsu has a stock he was touting in a recent email, a tip he’d love to pass along to you if only you would pretty please with sugar on top subscribe to China Strategy.

It’s a brief tease.

He says that whether a company “gets it right” when modifying their products or their marketing for the Chinese consumer is a huge difference-maker for separating those companies with effective Chinese business from those who are just “investing in China” and hoping to take advantage of the sea of potential consumers without adjusting their products.

This is an argument you’ve probably heard many times before. Successful businesses adapt to their customers, not usually the other way around.

In Hsu’s words:

“… the poster child for doing China right is a fast-food outlet that sells Western-style…noodles!

“Wisely, the company teamed up with local entrepreneurs, sought out local franchises, and adapted to local tastes.

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“Every trip through China with my China Strategy subscribers ends with a nice dinner at this restaurant chain. In China, where this is considered a top ‘date restaurant,’ a waitress takes our order and the very brightness of the lighting signifies abundant wealth. By this time in our journey together, my subscribers had adjusted to Eastern ways. We settled on a Deep Sea Eel pizza, large with all the toppings. Just like the natives.

“In today’s issue of China Strategy I show you why you should invest in this wonderful Western-style noodle shop in China. The stock is as American as apple pie, and the profits you make will be as big as Texas—all in a New York minute. And you, I promise, will feel like a smart cookie for getting China right. Join China Strategy now for all the details on how to invest in this company.”

So … the “noodle shop” bit might throw you off a bit, but this is …

Yum Brands (YUM)

Which owns Pizza Hut, Kentucky Fried Chicken, and Taco Bell. And yes, Pizza Hut is an upscale restaurant in China, and it has met with some success, probably in part because it does indeed offer variations for Chinese tastes — like Deep Sea Eel as a pizza topping. And yes, they do sell some noodle/pasta dishes, too, just like they do here.

In fact, Yum Brands is now pushing forward with expanding Taco Bell into Mexico, too … so it goes both ways, the popularity of Taco Bell in Mexico will probably not be because they make it “more Mexican”, there are more than enough taco chains South of the border already … the Taco Bell success in Mexico, if it comes, will be because it’s an American brand with a standardized product.

No word yet on whether they’re trying to expand into Italy with Pizza Hut.

Hsu gives the example also of McDonald’s, which has not done so well in China because there’s no particular affection or tradition for the hamburger there — but McDonald’s does make local adjustments, too, just apparently not successful ones in this instance (ever have a beer at a McDonald’s in Europe? A lobster roll at a McDonald’s in Maine? I don’t know how they adjust their Chinese menu, but apparently it’s not enough, and maybe they don’t “upscale” the experience like Pizza Hut does).

Kentucky Fried Chicken, by the way, is also very popular in China — partly because chicken was already popular in the country, and partly because they adjusted their menu and design pretty dramatically, too.

Hsu has been recommending Yum Brands for a long time, and claims profits in the range of 60% so far in recent emails, if I remember correctly.

YUM trades at a bit of a premium to its fellow big fast food chains, largely because they have been so successful in China and are often touted as a way to invest in China without taking on the risk of buying Chinese companies. It’s a very big company, and is profitable and growing … if you’ve never looked at it before it may be worth a gander, but this one is not likely new to many of you. The Motley Fool also touted it as part of one of their ads last year, if you’d like to see the Gumshoe writeup on that one.

There are other stories about retailers and restaurants that are trying to and/or have successfully gotten into the China market — I looked at one last year that a newsletter was touting as the Starbucks of China (though Starbucks is itself growing fast in China, too, and trying to solve the riddle of the Chines consumer). That one turned out to stink with both nostrils.

Most of the “Next … in China” stories are probably hooey (just like most “next Google” or “next Starbucks” stories everywhere), but YUM has a track record and a decade or so of good growth there to build on. This may or may not be a good investment, but it is a real one, with a good market position and a valuation that’s at only a little bit of a premium to the market average. They had 30%+ growth in earnings last quarter, announced a few weeks ago, and they’ve boosted their outlook for the year. We could all do worse.

Happy investing.


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John, I emailed you to see if I can answer your questions that way, I’m not sure exactly what you need.

Ben, I wrote about those a couple days ago — he’s essentially touting all three of the Brazilian bank stocks that trade as ADRs:
http://www.stockgumshoe.com/2008/05/brazilian-bank-stocks-to-go-ballistic-navellier.html

Jimmy
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Jimmy

As of a few years ago, McDonald’s was selling more chicken burgers than hamburgers. I don’t know if that’s changed, but that obviously gives KFC an edge.

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Rich
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YUM at 6 was an outstanding buy.
At 35 it may still go to 58.