Looking Back at Another Miracle Year 12-28-06

Inside China Dispatch: 12-28-06

Robert Hsu, December 28, 2006

Dear Fellow Investor,

It's hard to believe that we're already at the end of 2006—and the first anniversary of Inside China Dispatch and China Strategy. What a year it has been! In less than 12 months, we've added more than 10,000 of your fellow investors to the growing ranks of those who recognize the amazing wealth-building opportunities created by China's growth and want in on the profits.

I want to personally thank you for getting us off to such a great start. I'm honored by the trust you've put in me, and I want you to know how seriously I take my job of finding the best China-related investments for you while also keeping you away from the high-risk stocks that can devastate your portfolio.

China Strategy and Inside China Dispatch combine two of my real passions in life: China and investing. My goal is to help you better understand China's culture, society and economy and to help promote an understanding between America, my adopted land, and China, the land of my ancestors. And most importantly, I want to help you build your fortune from this historic opportunity.

I'm proud that we succeeded on both counts in 2006. I hope you know a little bit more about China and the sweeping changes taking place there, and our stocks have done phenomenally well for us this year. Our current China Strategy stocks are up an average of 32%!

In today's Dispatch, I thought we'd look back at a few of the significant trends we followed in 2006 and how they are driving our stocks dramatically higher.

Looking Back at Another Miracle Year

There's no question that in 2006 the China Miracle continued to unfold just as we expected, with explosive growth in many areas—and exploding stock prices as well. Of the 26 total stocks we've owned in China Strategy during 2006, 21 are either up since I recommended them or were up when we sold them.

That's an 80% success rate, which I doubt few other investors can match. I say that not to brag, but to point out that while we're profiting from great opportunities, we're also being smart about keeping our risk low.

The reason we're so successful is that we're investing in the dominant themes of the China Miracle. Our unique insights, firsthand knowledge and boots-on-the-ground approach help us identify both the most significant trends and the stocks best-positioned to benefit from them.

Let's review some of the biggest trends from the past year:

1. The Golden Age of Chuppies and Entrepreneurs: The overarching theme of the China Miracle is a red-hot economy. In the past year, it grew over 10%—more than three times the U.S.—leapfrogging France and Great Britain to become the world's fourth-largest economy.

What you don't hear as much about is that much of this growth is coming from the private sector. Up until a decade ago, China's economy was entirely state-controlled. However, the percentage of the economy controlled by the private sector has more than doubled in the past 10 years.

Another important factor you don't hear much about is China's rich entrepreneurial tradition. This is a strong source of pride for the Chinese. For most of its long history, China was one of the great commerce nations of the world. It has been buried under a repressive regime for the last 100 years, but through my contacts and visits there, I've seen firsthand that the entrepreneurial spirit and the desire to succeed economically remain a strong part of the Chinese people today. As the government continues to loosen its grip, they're getting an opportunity to succeed—and they're making the most of it.

Many of these new businesses are targeting China's expanding middle class, especially the Chinese urban professionals —or "Chuppies," as I call them. Increasing wealth is leading to more spending, and spending will only accelerate in the coming months as foreign banks are allowed to do business in China. I expect them to bring their credit card expertise to China, resulting in an explosion of new "plastic" that will unleash pent-up consumer demand.

The timing is perfect. Unlike in developed countries such as the U.S. and Japan, most of the wealth in China is controlled by people under 45 years of age. These younger Chinese have not experienced the economic hardships of the Cultural Revolution, so they are more willing to spend and take on debt. That's why I believe Chuppie consumption will be the greatest investment theme in the world over the next several years.

Most of my current recommendations are among the best-positioned stocks to profit from China's golden age of Chuppies and entrepreneurs. They include:

1. Our healthcare stock, up 49% for us in 2006
2. Our education stock, up 37%
3. Our advertising stock, up 98%
4. Our online travel stock, up 53%
5. Our gaming stock, up 48%

As you can see, these companies are doing spectacularly well for us, and I'm just as excited about their prospects in 2007. (Click here now to view our complete portfolio right away when you join China Strategy at discounted prices.)

2. China's Exploding Wireless Sector: Wireless usage in Mainland China continues to grow rapidly. The cellular phone penetration rate in the biggest cities now exceeds 100%, so there are more cell phones than people in many places. And that's saying something when you consider the amount of people in China! At more than 400 million, China's number of wireless customers is bigger than the entire population of the United States.

With the high penetration in urban areas, further growth will come from phone and service upgrades in the cities as well as expansion into rural China. Our top wireless play excels in both and continues to take market share away from its smaller rival. That's why the stock is up a fantastic 84% for us this year.

I'm especially impressed by this company's recent growth in rural areas. When I took a group of China Strategy readers to China in September, we saw its stores everywhere in the rural farming towns. And according to the most recent quarterly report, the number of rural wireless customers increased by over 20% this past year. I expect to see the firm's total customer base exceed 300 million sometime in the first half of next year and the stock to continue moving higher. (You can get all of the details about our wireless play and our other stocks when you join China Strategy. Click here to learn more.)

3. The Las Vegas of the Orient: Macau, the only place in the Chinese-speaking world where casino gambling is legal, is surpassing Las Vegas as the number-one gambling destination in the world—at least in terms of revenue. Business is booming there, and our Macau play is aggressively taking advantage. The stock is up a phenomenal 90% since I first recommended it in March.

This company operates the biggest casino in the world in Macau, and even more importantly, its plans to build an Asian version of the Las Vegas Strip (known as the Cotai Strip) are right on schedule. The flagship resort on the strip will open for business next summer, and I'll be sure to pay a visit and let you know what I find out.

There's much more to this company than its casinos. Top international chains like the Four Seasons, Intercontinental, Shangri La and Hilton all have plans to partner with it to open casino-resorts on the Cotai Strip.

I'm not a gambling man; I'm an investor. The two should never be confused. But you can see why I believe this stock is such a good bet for continued long-term profits. (Click here to learn more.)

Only the Beginning

As you can see, it's been a great year for the China Miracle and for us as investors. And this is only the beginning. In the coming year, we will continue to uncover and talk about exciting and profitable ideas regarding what I believe is the greatest investing opportunity of our time.

And in fact, next week we'll talk about some of the big trends I expect to develop in 2007 and how I recommend you profit from them.

In the meantime, I wish you a healthy and prosperous 2007.

Happy New Year!

Robert Hsu
Editor, China Strategy

P.S. What better way to kick off 2007 than with a brand new opportunity for big profits? That's just what we'll be doing when the January issue of China Strategy is released tomorrow. I'll be recommending a rapidly growing travel stock that could well double as we approach the upcoming Olympics in China. Click here to join us today and you'll be among the first to learn about this exciting new recommendation.

Inside China Dispatch: 12-28-06

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