China's "Homebody" Generation

Robert Hsu, October 01, 2007

The Chinese stock and real estate markets have been red-hot, but there are also other investment areas that are gaining strength in China.

Back in 1997, when many Internet stocks first went public, I saw sci-fi Hollywood blockbuster The Matrix for the first time. For those of you who aren't familiar with the film, The Matrix was about life in a computer-generated virtual reality world. After I saw the movie, I realized that as technology became more advanced, the line between the virtual and real worlds would become increasingly blurred, and many people would choose to spend more of their time in the virtual world. From this observation, I created an investment strategy around Internet stocks. I bought several Internet stocks, and I held them through a huge run-up until 2000. When the earnings momentum of these companies started to deteriorate, I took some nice profits.

Once again, I feel that we're at a similar point in technology that will allow a greater portion of the world to escape into the virtual realm.

Today, millions of people shop, socialize and gather more information online than from the "real" world. I, for one, buy far more books from Amazon.com than any brick-and-mortar bookstore. The explosion of Web 2.0 applications -- such as MySpace, Wikipedia and YouTube -- has allowed millions of users around the world to create content and increasingly participate in the online world. As a result, an entire generation of consumers under 40 is taking their online experience to the next level.

This is especially true in heavily crowded Asian cities, where competition for scarce resources is relentless. To millions of younger Asians, the online world provides an escape from the pressures of everyday life. An entire generation of online consumers has emerged in major Asian cities from Tokyo to Beijing. Many Asians from older generations think of this younger online generation as less sociable, more self-absorbed and not as influential in mainstream society as their elders. This might be true to an extent because people over 45 largely control most of the wealth in developed Asian economies like Japan, South Korea and Taiwan. In Mainland China, however, people under 45 control most of the wealth, and they have the potential to become a major force in driving global economic growth in the 21st century.

I like to call a subgroup of these consumers "homebodies," and these tech-savvy people are becoming a growing force in China.

"Homebodies" Revealed

"Homebody" is a loose translation of the Japanese word "Otaku," which means "another's house or family." In the 1980s, large groups of Japanese youth became obsessed with comic books and anime cartoons, and "otaku" was derisively used to refer to those who spent too much time at home pursuing their special interests.

The term spread to other Asian countries and lost a bit of its derisiveness as surfing the Net and playing video games became more mainstream. Today, the term encompasses a much larger group of Internet-savvy youths who would rather spend time in front their computers than go out.

Perhaps the closest English equivalent to otaku is "geek," but geek carries a derogatory connotation that does not exist in China against people who are obsessed with technology and virtual activities. Most Mainland Chinese who have access to the latest technology tend to be relatively young and affluent, therefore being a homebody who spends a lot of time on the latest tech gadgets is considered cool. Whether in Shanghai, Hong Kong or Taipei, Chinese homebodies have the following characteristics:

They are used to spending time alone, but they interact with others mostly through instant message and email.

Their primary leisure activity is playing video games or listening to music on their iPods.

They blog every day and share a distrust for commercial advertisement.

I expect that we'll hear a lot more from these homebodies in the future and that new companies will emerge to cater to this growing consumer segment.

From Hobby to Profits

There are 140 million Internet users in China today, second only to the U.S, and 22% of these users spend over 20 hours a week online, which would certainly qualify them as homebodies.

Some homebodies spend all of their waking hours online and develop a dependence on the Internet. In China, they're called "wan chong" or "Net parasites." As these terms imply, homebodies are not well-regarded in social circles. But most homebodies are not extremists -- they only use the Net as an enabling tool.

The most interesting homebodies are leaders who have developed a large online following either through their superior knowledge and skill or their desire to express themselves. Many of these people have strong research skills, interesting ideas, strong opinions and a willingness to share their thoughts. Some of them have created huge online communities and blogs with thousands of regular visitors. As editor of China Strategy and Asia Edge, two of the fastest-growing Net-based investment newsletters in the world, I can relate to these superbloggers.

There are 22 million bloggers in China today. Likewise, there are also over 20 million online gamers in China. Over 50 million Chinese have bought items online, mostly through their cell phones. There are enough homebodies around now to influence the way Chinese live, shop and think. Because homebodies tend to be strongly opinionated and proficient in communication technology, they often lead major consumer and populist trends in China.

Our Shanghai-based consumer trends analyst Frances told me that she has a friend who started a stock trading blog early last year, and after making good recommendations, attracted a dozen private investors who asked her to manage their money. This 28-year-old lady then quit her full-time job, which paid only $800 a month, to become a professional money manager. Now she has over $2 million under management and is on track to make over $100,000 this year from her incentive fees.

I've always been skeptical of late-night infomercials that tell viewers to quit their jobs and work from home for big money. In China nowadays, though, if you have a good idea and Internet access, you can make more money from home than from a 9-to-5 job. In China, it can pay to stay home.

Our "Homebody" Strategy

Now I'm not saying that you should quit your job and start your own blog. There are other ways to make money from this phenomenon. I believe that we should focus on investing in companies that understand this portion of the Chinese population and that are actively and successfully targeting this group.

Many of our companies target homebodies as a primary or important source of their revenues. Ctrip (NASDAQ: CTRP), China's leading online travel service, is a billion-dollar business created by targeting this demographic group. The9 (NASDAQ: NCTY) provides a virtual world through its popular game World of Warcraft for homebodies to escape to. And China Mobile (NYSE: CHL) allows homebodies to communicate with one another anywhere in the country.

Here in the U.S., leading corporations such as P&G, Ford and Ikea have already built significant presence in popular virtual communities such as Second Life. They are starting to do the same throughout the Greater China region. The virtual world is indeed blending with the real world.

I expect that we'll see new and innovative companies born out of this growing segment of the Chinese population, and I'll be keeping an eye out for further investment opportunities in this area.

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