Morningstar Advisor - December/January 2012 - (Page 40)

Spotlight cement would shield non-Chinese production from weakness in Chinese cement markets. Because it’s costly to transport cement over land, plants typically have a shipping radius of no more than 300 kilometers. A slowdown in China’s capital expenditures would be a mixed bag for global chemicals companies. While end markets for chemicals include construction, consumption-driven markets such as agriculture, electronics, and consumer products are just as important to overall profitability. Investors looking for a way to maintain exposure to metals and mining while protecting against the likelihood of a rebalancing of China’s economy should consider Anglo American AAL. Anglo has less exposure to fixed-asset-investment-tied iron ore than other major miners do. Further, Anglo’s outsized platinum and diamond businesses (larger than those of any diversified peer) are well-positioned to benefit from growth in Chinese jewelry consumption that is likely to accompany strong household consumption growth. Rising Chinese vehicle-ownership rates, a staple of middle-income status, would also benefit platinum, owing to its use in vehicle catalytic converters. Health Care Evolves should spur a rapid build-out of research and drug development centers, which in turn would be a boon to the lab-supply industry. r The government is cracking down on collusion between health-care providers and drug companies. Firms that make generic drugs will benefit most from this initiative. r China is set to become the second-largest prescription-drug market in the world by 2015. (It’s seventh now.) The market is extremely fragmented, with no single firm having more than 2% of total prescriptions, so it looks ripe for Big Pharma firms. The health-care firms with the widest moats in China are the large multinationals. SanofiAventis SNY was one of the first multinationals in China when it entered the market in 1982, and its head start has given the firm nearly 30 years to build its brand and its wide moat. The firm’s broad presence in prescription drugs, vaccines, and over-the-counter medications creates strong brand awareness and makes the company one of the bestpositioned pharmaceutical firms to take advantage of China’s explosive growth. Roche’s RHHBY cancer biologics platform brand serves as a foundation of its moat in China. And although Roche’s biologics, like Herceptin and Rituxan, do not have patent protection in China, they function as patented products because of lack of generic competition. As one of the first multinational medical-device makers to establish a footprint in China, Medtronic MDT has a head start over its rivals. The firm has stepped up investments over the past five years, just as sales have reached critical mass. Medtronic unveiled a new patient education center in Beijing, a manufacturing facility in Singapore, and headquarters for its wholly owned subsidiary in Shanghai. Meanwhile, most of its competitors have taken a more cautious approach to China through joint ventures or technology licensing. Thermo Fisher TMO is a “picks and shovels” company that benefits indirectly from the rapid investment into the Chinese health-care system. The company is a preferred vendor for many pharmaceutical and research firms, and its one-stop-shop operating model works particularly well in the highly fragmented labproduct field in China. Foreign Automakers Rule the Road Over the past decade, China has been the go-to place for growth among many industrial companies. In particular, automotive manufacturers and heavy-equipment manufacturers have enjoyed robust gains because of the country’s emerging middle class and government-funded infrastructure boom. We expect these gains to continue, although we caution that rising capabilities among domestic Chinese manufacturers could crimp the market share of many foreign producers. (See “Where China’s Domestic Companies Stand to Benefit,” page 42.) In 2010, as the global automotive industry rebounded sharply from its recessionary lows, China surpassed Europe as the largest passenger and light commercial vehicle market in the world. Foreign manufacturers dominate sales, comprising the top seven market shares and eight of the top 10. Volkswagen VOW leads all others with an 18% share, with General Motors GM and Toyota TM closely behind. We expect China to continue growing at a solid clip over the next several years, and we expect these manufacturers, therefore, to enjoy robust results. We expect much of this growth to stem from luxury brands such as Audi (a division of Volkswagen), Mercedes (a Daimler DAI company), BMW BMW, and Cadillac (a GM brand). All have posted double-digit sales gains in China through the first half of 2011, and the continued rise of affluent citizens within China is likely to spur further demand, even if mass-market autos face headwinds. K Sumit Desai, CFA, is associate director of research development with Morningstar. Alex Morozov, CFA, director, health-care analysis; Debbie Wang, senior analyst, devices/CRM; RJ Hottovy, CFA, director, consumer; Paul Swinand, analyst, retailers; Adam Fleck, CFA, director, industrials; and Elizabeth Collins, CFA, director, basic materials contributed to the article. China’s health-care system evolved into one of haves and have-nots when China kicked off its economic reforms in 1979, which resulted in the widespread privatization of public health facilities. Two years ago, the government embarked on a reform effort with an investment of $125 billion to accomplish goals such as universal medical insurance by 2020 and infrastructure improvements. Against this backdrop, we see several dynamics that should contribute to continued robust growth of health-care spending in China: r China’s profit-driven, fee-for-service system leads to care levels that correlate with patient wealth levels. Wealthy, urban patients are demanding modern medicine practices with high-priced new technology that is highly profitable to caregivers. r The government is focused on growing the domestic biotechnology sector, which 40 Morningstar Advisor December/January 2012

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

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