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February 11, 2014

Oberweis Plays Chinese Consumer Card With Success

Jim Oberweis, president of Oberweis Asset Management, launched the Oberweis China Opportunities Fund (OBCHX) in 2005, when there were barely any Chinese stock offerings available to international investors outside of export oriented, state-owned companies in the manufacturing sector and some state-owned banks.

Nearly a decade later, the Chinese equity scene is vastly different and investors have an abundance of stocks of all kinds from which to choose. But being ahead of the curve in terms of viewing the potential of China to develop into a market driven by the improving lifestyles and changing tastes of a middle class that has grown in leaps and bounds has paid off for Oberweis. The $212 million China Opportunities Fund is now a five-star Morningstar fund and has consistently outperformed its category peers over the past years.

“We always believed that exports would be a hard way for Chinese companies to make money in the long-term, because countries like Vietnam, Indonesia and so on would be cheaper and have stayed that way, since wages and income are still low there,” Oberweis said, “but in China, what was important for us was the development of brands and the consolidation of consumption industries into major brands. Because of that, we thought there was an opportunity to look beyond state-owned enterprises to entrepreneurial companies that were consolidating industries and building brands as the Chinese middle market evolved. The strategy has worked well for us and we’re still doing the same thing today.”

Now, China’s conversion into a consumption-driven economy is a given investing theme for many portfolio managers, but because he set on the path early, Oberweis still enjoys an edge over others. The fund leverages off a team of China experts, two of which are based in Mainland China and the other two in Hong Kong, all of whom know the lay of the land. Their expertise in the region means they can look at China in a close, hands-on manner, Oberweis said, and sniff out the smaller societal changes that are occurring or that will happen as its economics continue to change China.

They are also experts in unearthing companies that are under-the-radar and whose stocks are unfairly valued.

“Our goal is to invest in companies that not many people have heard of before and where there are pricing inefficiencies,” Oberweis said. “The companies we invest in are growing faster than the Chinese economy but because they’re off the radar of most investors, we find value in them. Smaller, less-followed companies tend to operate in niches where growth rates are healthy and valuations are reasonable, and hopefully these companies can escape the main economic challenges that China as a whole faces as they are in niche sectors.”

Take a company like China Modern Dairy. Oberweis recently visited its farms in Inner Mongolia, and he believes the company has great prospects because the increasing demand for and tight supply of milk in China will drive margin expansion. Ditto for PAX Global, a Hong Kong-based business that runs mobile processing terminals, an area Oberweis believes will only grow going forward as disposable incomes increase in China and more people have access to electronic payments. Looking ahead, Oberweis believes that e-commerce will be a huge area for investment opportunities.

“It’s like 1999 in terms of growth rate opportunities for Internet companies in China, but the Chinese market is much larger than the market was here, so your potential returns from a scalable e-commerce strategy are much bigger,” he said. Oberweis also believes that there will be investment opportunities in China’s healthcare and environmental protection sectors, because “as lifestyles improve and demographics change, these areas will become important and we will see more and more companies coming into those areas.”

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