The Best Restaurant Stocks in China

This weekend I was up in Flagstaff relaxing at our family cabin.  If you’re not familiar with Arizona, Flagstaff is the largest city in Northern Arizona. It’s home to Northern Arizona University and is often used as a stopping point for travelers making their way to the Grand Canyon.

The cabin’s a great escape.  It’s the perfect location to avoid the heat of the desert, the bustle of the city, and the distractions of everyday life.  Temperatures this time of year are in the high 70s with overnight lows in the mid 50s.  The only struggle is the end of the weekend when you need to talk yourself into packing up and leaving.

To put it simply, it’s the ideal relaxation spot.

As you can imagine, at the cabin I get quite a bit of reading done.  Of course my fun reading is financial journals, news, and industry reports.  I know, I’m a bit crazy.  Anyway, one of the articles I read was about China.  The investment ideas offered up made little sense to me.  A lot of convoluted numbers and incorrect conclusions were drawn.

That’s when I thought to myself there has to be an easier way.  So I did a bunch of research and I discovered some interesting facts . . . but more on that in a minute.

  Now many of you have read my other articles on China.  I think as an emerging nation, it’s a great one to get behind from an investment standpoint.  Investing at these early stages is always risky, but the rewards are tremendous.

The nation is in the midst of one of the largest developments we will see in our lifetimes.  Development is progressing at a break-neck pace.  Roads and bridges are being built, industry is sprouting, and the workforce is evolving.

What do I mean by that?

I mean that just 20 years ago the country was primarily focused on agriculture.  Now a significant portion of the country is focused on manufacturing, construction and other trades.  Products in China are being developed and built.  As a result, the workforce is growing, as is the middle class.

The opportunities are everywhere in China.  So, how can the average US investor get in on this great opportunity?  I’ve already talked about the China ETFs.  These baskets of stocks are great, but what if you want something more specific?

I started thinking about all of the US-based companies expanding operations in China.  It seems not a day goes by without someone announcing a new China initiative.  Automobiles, industrials, energy companies, even restaurants.  Everyone is jumping aboard the growth of China.

Then I had another thought . . .

Asian diets are changing.  It used to be rice and vegetables.  Now the Chinese diet includes more protein and packaged and processed foods. The US fast food culture (for better or worse) is making its way across the ocean and setting up shop in China.

The Big Three of Fast Food.

McDonald’s (MCD) sees the growth in China.  They have plans to open around 275 new stores by the end of 2009.  That’ll bring their total to about 1,000 restaurants.  Burger King (BKC) was early to the China trend but clearly stumbled.  They opened the first store in 2005 to great fanfare.  Today they’ve added a whopping total of 12 new stores according to China Retail News.

What a missed opportunity.

There’s one company that’s outdoing both Burger King and McDonald’s. Yum! Brands (YUM) is clearly breaking away from the pack.  I know. They have a strange name, but I didn’t make it up.

Now if Yum! doesn’t sound familiar to you don’t despair.  You probably know them by one of their restaurant names.  As a matter of fact, I’d bet you’ve probably eaten at one of their stores in the last month.

Yum! operates and franchises stores under the banners of Long John Silver’s, Pizza Hut, Taco Bell, A&W, and of course KFC.

Does that ring a bell?  I thought it would.  This company is truly amazing; it’s like owning five different fast food companies all at the same time. They have more than 35,000 restaurants in more than 110 countries. And in 2007 their sales were more than $10 billion.  Not bad for a fast food chain.

But that’s not even the exciting part.

Remember the facts I promised you?  Here they are.

The real excitement for Yum! Brands is China.  Since 2005 the company has been breaking out results for the China division.  That’s how important this growth is to Yum.  The company has opened more than 3,100 stores in China and more are opening every day.

This is their number one market for expansion.  Just last year alone, the China Division contributed more than $375 million in operating profits.  In 1987 they opened their first KFC in China, now they have more than 2,200 operating right now.  Their Pizza Hut franchise is working hard to catch up.  They opened the first Pizza Hut in 1990.  Now they have 360 stores in operation . . . and more on the way.

For Yum! Brands the growth potential seems unlimited.  If you ask me, Yum! Brands is the American way to capture growth in China!

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