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Trip to China Proves Fruitful Personally and Professionally

I didn’t have a strong business agenda for my visit to China. The real purpose was to put a face on the place, so to speak. I was fortunate to hear lectures by people with extensive China experience and to go on a couple of interesting factory visits. But the investing system used by the Cabot China & Emerging Markets Report doesn’t make a lot of use of the kind of “look-them-in-the-eye” analysis of management that is popular with large institutional investors.

It’s easy to get to China, especially now that Russia allows flights to go over Siberia. You just saddle up in Toronto on an Air Canada Boeing 777, then sit on that airline seat until it feels like a concrete block, and ... voila! A little more than 14 hours later, there you are in Shanghai.

China has done a lot of work in getting ready for the Summer Olympics and I saw the proof in the clear signage that routed us through the airport. I also saw the massive new terminal that was due to come into operation soon after I left. China’s ready.

Shanghai, being the largest city in China, is hard to take in. It has towering world-class skyscrapers and tile-roofed neighborhoods right next to one another. It has glitzy shops that wouldn’t look out of place on Rodeo Drive, but you only have to walk 10 minutes to find street after street of standard 10-foot wide, open-front Chinese shops selling everything from hardware and building supplies to clothing and snack foods.

Bagaining in Tao Bao City

Another contrast is between the high-end stores and the knock-off supermarket called Tao Bao City. Tao Bao is a huge three-story building (maybe four; I didn’t go that high) that’s jammed with shops selling fake name-brand merchandise. The government of China is a little touchy about the charge that it tolerates violations of trademark agreements, so many of the shops appear to be lined top-to-bottom with T-shirts. But behind the T-shirts there’s a wealth of knockoff Prada, Gucci and Louis Vuitton.

I went to Tao Bao looking for a cheap suitcase to transport some of the treasures my wife and I had acquired back to the States. I went primed with the very latest in haggling techniques and did pretty well. The standard technique of these merchants is to make you an offer for the goods in question by entering a number on a big calculator. The first offer I got for the small, hard-shell “Samsonite” I had my eye on was 650 ren men bi, the official Chinese currency, which is trading at just about seven to the dollar.

At this point, many westerners will counter-offer half and the merchant has essentially won the game. Fortunately, I knew how much another member of our group had paid for just such a suitcase, so I was loaded for bear. I took the calculator from the Chinese guy and started doing all kinds of calculations. I took the square root of his price, multiplied and divided it by some random numbers and finally got the number to come to my intended counter offer of 150 rmb.

The merchants had been following the calculation with interest, not to say astonishment, and were properly offended by my offer. So they gave me their “final no-negotiation” price of 200 rmb. I told them that there was no such thing as “no-negotiation” and offered 190, leading to a final price of 195 rmb or about $28. I had my suitcase and, more importantly, I had beaten the price that my friend had arrived at after long, hard negotiation. Bragging rights are important.

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It’s probably possible to get around Shanghai without a guide, but it wouldn’t be easy. My wife and I were in the company of friends who were visiting for the third time and knew the subway system (clean, quiet and cheap!) and the general lay of the land.

Even with their familiarity, the basic method of getting around is a note to a taxi driver. You figure out where you want to go, you tell the concierge of your hotel and he writes a little note in Chinese that you give to your taxi driver. It usually works pretty well ... but not always.

We had a large group going to dinner at a restaurant called 1221 that was recommended by a guidebook. We piled into two cabs and took off. 1221 is located at the end of an alley and has just a small illuminated sign out on the street. One cab arrived quickly, with a fare of just 11 rmb (the minimum), while the other didn’t get there until about 15 minutes later with a fare of 16 rmb. Shanghai isn’t all that easy to navigate, even for natives.

The restaurant, by the way, is well worth seeking out, if only for the eight-treasure tea, which combines tea, flowers and two or three kinds of edible fruits. You get a continuing supply of hot water from a wandering waiter who wields what looks like a watering can with a thin, four-foot spout on it with astonishing accuracy. Good tea and a good show. The food was uniformly so good that we felt we could have ordered at random, although the Sichuan beef with sesame bread was a real standout.

Guided Tour

Back to the notion of having a guide. We had hired guides to meet us at the airports in Beijing and Xi’an. Having a driver to take you to your hotel and deliver you to the Great Wall or the terracotta warriors is close to a necessity. It also gives you a person with good English and a wealth of information about the sights that adds immeasurably to your experience.

Even when a guide isn’t all that enthused about the sights (as our guide in Xi’an wasn’t about the terracotta warriors), if we hadn’t had her to get in the face of airline officials when our passport numbers “disappeared” from their computers, we might still be hanging around the Xi’an airport.

There is one aspect of the guiding system that my wife and I were ambivalent about, and that’s the practice of delivering tourists to selected factories for informative programs and shopping opportunities. Our first such visit was to a tea emporium where we were treated to an excellent introduction to the different kinds of tea and the proper way to brew them. Then the person who gave the introduction led us to the showroom where we could select teas, pots and cups and associated gear.

We dropped an appropriately sized bundle on tea, but we hadn’t realized that this was going to be a standard practice. During our trips to Beijing and Xi’an, we were taken to emporia specializing in jade, pearls, silk, and (appropriately enough) terracotta warriors. We also found that attempting to opt out of these visits was fairly difficult, requiring us to indicate, in writing, that we had refused the visit.

Clearly the company supplying the guides had made an arrangement with the various purveyors of Chinese goods and was profiting from it.

On the one hand, we were being offered high-quality goods in the categories that most tourist shoppers would want to know about. On the other hand, we were being delivered like cash cows to places we had expressed no desire to see.

This leads me to one of my big conclusions about China, which is that people there really want to sell you stuff and will not hesitate to sell to you as aggressively as necessary. As we were running through the gauntlet of hawkers during the approach to the cable car that would take us up to the Great Wall, one woman assured me that she would remember me when I came back down, going so far as to write her name and shop number on a piece of paper for me.

We eventually got to be quite skilled at shedding the street vendors of Shanghai who wanted to sell us “Rolexes” and other replica watches. You just need to put a touch of dismissive exasperation into your “bu yao,” which is Chinese for “don’t need.”

As with so many of life’s experiences, you need to know in advance what you want and stick to it. I was really struck by a beautiful turned jade bowl at the jade factory, but wasn’t prepared to lay out 1400 rmb ($200) on an impulse purchase. I may regret that one.


Chindex: Western-Style Medical Care

I didn’t have a strong business agenda for my visit to China. The real purpose was to put a face on the place, so to speak. I was fortunate to hear lectures by people with extensive China experience and to go on a couple of interesting factory visits. But the investing system used by the Cabot China & Emerging Markets Report doesn’t make a lot of use of the kind of “look-them-in-the-eye” analysis of management that is popular with large institutional investors.

With all that said, I was impressed with the operation of Chindex, a company that is offering Western-style medical care at its private hospitals in Beijing and Shanghai and clinics in smaller cities. Catering largely to the expatriate community in cities rich with foreign workers, Chindex is expanding its footprint; among its plans is construction of another hospital in Guangzhou.

The company began as an importer of western-style medical equipment and sold the first CAT scanner to come to China. Recent trends have shifted the revenue model away from equipment sales and toward providing health care.

I got a good look at the kind of care Chindex provides when a member of the group I was with was hit with what seemed to be a fever and a lack of appetite. She was pretty miserable, but the Chindex doctors ran her through a quick battery of tests (all negative) and got her back on her feet. It was an impressive demonstration of personal care. It was also in stark contrast to the Chinese community hospital just next door, which we also toured.

The company has been around since 1981, but the sense I get is that they’re just now getting a firm bearing on how to make money in the China market. As the size of the ex-pat community in China increases, health care has gradually replaced medical equipment sales as the company’s main driver of earnings.

Institutional investors are finally beginning to sign on and the company’s after-tax profit margin just doubled in its latest reported quarter. 2008 earnings are forecast to rise by 159% from 2007 levels.

CHDX is a high-beta stock and not for the faint of heart. On the other hand, in October 2005 it was trading at 3 and it’s now up around 38. It’s a business that will reward further investigation.


Paul Goodwin
For Cabot Wealth Advisory

Editor’s note: Chindex isn’t in the Cabot China & Emerging Markets Report portfolio, and may never be. But the Report is still at the top of the list for performance among all investment newsletters. For the 12 months ended February 29, its gain is 72%. If you’d like to take a look at what emerging markets stocks can do for your portfolio’s performance, a risk-free trial subscription is just what you need. Clicking on the link below will get you started.