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Denver Broker's Love for China Pays Off
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Story Filed: Wednesday, April 05, 2000 3:25 PM EST
Apr. 2 (The Denver Post/KRTBN)--Steve Muth can't restrain himself on the subject of China.
The top broker with Kirkpatrick Pettis, an Omaha investment firm with Denver offices, wears Chinese writing on his shirt collar.
He named his feline China Cat, and the dining room in his home south of Aurora is filled with souvenirs gathered on trips to the Middle Kingdom.
And his clients -- a collection of wealthy individuals for whom he brokers trades and manages money and institutional investors that rely on his recommendations -- say his Chinese stock picks earn them triple-digit returns.
"When I began investing in Chinese companies 10 years ago people thought I was crazy," Muth said. "But the growth there is gaining credibility today."
Judging by last year's performance, Chinese stocks are hot. The Hang Seng index of Hong Kong stocks, for example, rose 74 percent during 1999, close to the Nasdaq's astounding 86 percent return. That, however, followed losses during the two previous years.
The Hang Seng is up just over 1 percent this year, but other Chinese indices are doing better: The Dow Jones China 88 and Shanghai indices are each up more than 30 percent this year.
Muth focuses on a specific sector of stocks: contract manufacturers. These companies make products of all kinds for the electronics industry, from circuit boards to MP3 players and two-way radios. Their business is growing rapidly.
Contract manufacturers account for about 11 percent of the electronics hardware market, Technology Forecasters, a market-research firm, told The Economist magazine recently. That number is expected to double in three years.
Muth likes the industry as a whole, but in China he's found a number of manufacturers poised for growth in earnings and stock price. All of the companies he has identified are traded on the New York Stock Exchange or Nasdaq. The local markets in China, including Hong Kong's, are too risky, he said.
Three Chinese companies Muth recommends, according to his clients, are Nam Tai Electronics Inc., Bonso International Electronics Inc. and Qiao Xing Universal Telephone Inc.
Taken as a group, those stocks are up 240 percent for the last year and 30 percent so far this year. Contract manufacturing is China's "strong suit at the moment. Companies all over the world are going there for their manufacturing," said Craig Grossman of Allied Conservancy Group, a Floridabased private fund that manages $1 billion.
"Steve identified that niche early, and he does his homework," said Grossman. "He's got his thumb on the pulse of that market, and that creates opportunities."
Mike Moses of MFM Advisory Inc., a $250 million private hedge fund that operates out of Chicago and Phoenix, said, "We've had numerous huge successes due to Steve's research and ability to find value where no one else has."
In addition to advising institutional investors, Muth brokers trades and manages about $100 million for wealthy clients. In Denver, his clients include Denver Burglar Alarm and Jackson Burglar Alarm founder Stew Jackson, developer Tommy Vickers, car dealer Doug Moreland and a handful of professional athletes.
He makes three to four trips to China a year, often taking clients such as Jackson to meet company executives. On a trip last year, Jackson was so impressed with Bonso that he bought a 17 percent stake in the company and now sits on its board of directors.
"I've been around for a while, and I've never met anybody as sharp and straight-ahead as he is," Jackson said.
Muth, 40, a Salt Lake City native whose father was president of the Utah Stock Exchange, said he first became interested in China 10 years ago as he searched for value stocks with high potential for growth. He couldn't find what he was looking for in American companies, so he looked abroad. Once he found China, he's never looked back.
He compares China today to Japan 30 years ago, when the island nation began to emerge as a global economic power. The Chinese have a similar work ethic and desire to succeed, Muth said. The difference, however, is that China has virtually boundless human and natural resources, while Japan's physical size put an end to its productivity gains in the 1990s.
China also differs from other emerging economies in its stability, Muth said. Though the Chinese government often is viewed by Westerners as oppressive and slowmoving, Muth believes it is moving cautiously in the right direction .
"Unlike in Russia, they're saying "We're going to feed our people while we're changing,' " Muth said.
Congress is considering China's proposed accession into the World Trade Organization, which would allow the nation to trade with much lower tariffs and regulations. Muth said he has little doubt China will be included, but even if it isn't this year, it will happen eventually.
Joining the WTO will give Chinese companies credibility with investors, Muth said. That, combined with China's quickly growing gross national product and its mushrooming middle class, are making China more accessible to the average investor, he said.
"People are beginning to lose their fear in China today," he said. "Now is the time to buy Chinese stocks."
By Greg Griffin
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