Investing In China: One Stock Succeeds Where Others Struggle

China’s 1.3 billion people represent a giant growth market for multi-national retailers, but not every company that expands there will emerge richer. Here’s one thing that helps: doing some homework.

Some big companies have discovered the hard way that Chinese are different than Americans. That’s the gist of this Wall Street Journal story that runs through a list of some companies that are pulling back on China. They include Home Depot (HD), Mattel (MAT), Best Buy (BBY) and Wal-Mart (WMT).

HD Chart

HD data by YCharts

But it is possible to do business successfully in China, and the prime example is Yum! Brands (YUM). People line up at its KFC outlets. Going to Pizza Hut there is a fancy night out. As the Journal points out, Yum has adapted to local tastes and sells egg tarts, soy milk and other specialized menu items.

How can you recognize a company that has done its homework? The number of mentions in an annual filing might be one small indication. Home Depot mentioned China six times in its most recent 10-k, and Mattel had it eight times. By contrast, Yum has pages of details about its plans in China, which is central to Yum’s growth strategy. In addition to its recognizable fast-food concepts this year, it also owns 93% of the Mongolian hot pot chain Little Sheep Group.

Yum had same-store sales of 19% in China last year, versus 3% at its international division and a 1% decline in the U.S. (Last quarter that was 10% in China vs 6% worldwide.) Moreover its Chinese and international divisions represented more than 70% of its operating profits. That, as YCharts’ Dee Gill earlier pointed out, means it could get hit more than others by a slowdown in China.

YUM Chart

YUM data by YCharts

To be sure, investors are paying a premium over McDonald's, which hopes to have 2,000 restaurants in China by the end of 2013 (vs Yum's 4,500).

YUM PE Ratio Chart

YUM PE Ratio data by YCharts

It’s interesting to note how Yum treats its Chinese business. It has a division devoted to China, separate from the rest of its international business. The China division is based in Shanghai, while the international division is based in Dallas. It put Jing-Shyh S. Su, chief of its Yum division, on the company’s board in 2010.

This year it formed another separate division to focus on another country, with 1.2 billion people: India.

From the editors of YCharts.YCharts Pro Investor Service includes professional stock charts, stock ratings and portfolio strategies.

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