What Do AMC, Huffy, Hoover, and Your Stock Picks Have In Common?
If you were shopping for a bicycle, and if money were no object, would you buy a Trek ... or a Huffy?
Now, say you're shopping for a new luxury car. Think fast: BMW or Saab?
How about a vacuum cleaner: Dyson or Hoover?
What these three questions have in common is a single judgment call: Do you trust the quality of the "Made in China" label, or don't you? Because Huffy, Saab, Hoover -- all famous Western brands once considered of at least decent, and in some cases superior, quality, are all now owned by Chinese companies or made in China.
Red Storm Rising
This theme is going to become much more important to consumers -- and investors -- in coming years, as China accelerates its spending of foreign exchange reserves to buy up Western companies, hoping to piggyback upon their brands.
Just a few months ago, China's biggest movie theater operator spent $2.6 billion to acquire America's AMC Entertainment. Just last month, China embarked upon its most ambitious buy ever -- a $15.1 billion purchase of Canadian oil producer Nexen (NXY).
At the same time, in a little-noticed investment, China's biggest securities firm by market cap, Citic Securities, announced last month that it was buying leading independent stock analyst CLSA from France's Credit Agricole. Initially, Citic plans to take only a 19.9% interest in CLSA, but by sometime mid-2013, the securities firm says, it will acquire the whole brokerage -- lock, stock, and barrel -- for a total cost of $1.25 billion.
Why is this important? When it comes to the products you buy, it probably isn't terribly important to you. Your average American consumer probably has more to fear from the quality of poisonous Chinese toothpaste, lead-tainted children's toys, and other low-quality consumer goods than from anything that might emanate from a Chinese stock research house.
But for investors -- and you are one if you participate in your company's retirement plan or even buy mutual funds (where analysts handpick the companies that the portfolios purchase) -- there is a worry here, and it bears some examination.
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We Come in Peace
On the surface, there may seem no cause for alarm. Announcing the acquisition, Citic stated its commitment to CLSA's "existing independent structure" and to the "independence of its operations." It assured investors that all it really aims to do is "bring capital market products and services from China to international clients" while also attracting "global clients who wish to access China."
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Hard to argue with that. But here's the problem: Back in May 2011, when the plan to buy CLSA was but a twinkle in Hu Jintao's eye, CLSA strategist Andy Rothman warned investors of what happens when the Chinese government gets hold of a finance company. Not mincing words, he told us to expect "high-frequency interference" in that firm's operations.
Fast-forward 15 months, and now Rothman's employer, CLSA, is getting taken over by a company indirectly owned by the Chinese government.
This raises the question: Should investors keep believing in CLSA's impartiality? Or will we see an uptick in the number of Chinese small caps (fraudulent and otherwise) receiving "buy" ratings from this formerly independent source?
Just last week, CLSA recommended that investors pile into the stock of Changyou.com (CYOU) -- the "Chinese Zynga (ZNGA)" -- a stock that's lost 45% of its market cap over the past year. Sure, CLSA has always put particular effort into covering Chinese stocks. But going forward, its motivation for the coverage, and its motives in urging investors to buy or sell specific stocks, will be suspect.
Trust, but Verify
CLSA's Rothman says he fully expects to retain his "autonomy" under CLSA's new management: "They have committed to providing us the same degree of independence and the same room for creativity that we've enjoyed in the past," he recently told Businessweek.
Let's hope that's true. Because until it's proven true, concerns over the quality of anything coming out of China will linger -- bicycles, toothpaste, and now buy/sell recommendations for stocks.
Motley Fool contributor Rich Smith holds no position in any company mentioned above.
