Investing in China – Where to Start? – Caterpillar Inc. (CAT), Philip Morris International Inc. (PM)

China has just celebrated its New Year – the year of the Snake. This country has also reached a milestone as it eclipsed the U.S in terms of total value of trade balance: in 2012, China’s total trade balance was $3.87 trillion compared to $3.82 trillion for the U.S. These figures are very close but they represent part of the ongoing shift towards the Chinese economy. This country still has a long way to go until it will reach the importance of the U.S – China’s GDP is nearly half the GDP of the U.S. Nevertheless, the high growth of China’s economy is keeping this country as an opportunity worth exploring.  The growth in China and other leading countries in Asia are reflected in the growing revenues of many U.S companies that operated there. The financial risk is likely to be lower in investing in a U.S company than directly investing in Asian markets or companies. Let’s examine several companies that already operate in China and other leading countries in Asia so that these companies make it possible for investors to benefit from the growth in these countries.

Caterpillar Inc. (NYSE:CAT)

This company is expected to augment its business in China in 2013 on account of the decision made by the Chinese government to spend over $150 billion in infrastructure projects in the coming years. The rise in China’s expenditures is likely to reflect in an increase in Caterpillar revenue. According to the yearly reports of 2011, by 2025 nearly 966,000 km of new roads will be paved and dozens of transit systems and airports will be built in China. Despite these positive projections, based on the recent dealers report, Caterpillar’s machines retail sales declined in Asia/Pacific by 7% during December 2012. Furthermore, investing in China has its perils that should be taken into account: Caterpillar’s purchase of Siwei, a company known for producing mining roof support equipment, proved to be less attractive than it was first projected, as the accounting misconduct in this deal led Caterpillar to add a goodwill impairment provision of $580 million in the latest quarterly report. So even though the company’s business in China/Asia has positive projections, there are perils worth considering.

Philip Morris International Inc. (NYSE:PM)

For Philip Morris the Asian region is leading all regions in terms of revenues: the revenues of company reached nearly $11.2 billion in 2012. The growth in sales was around 4.6% (year-over-year), which is only lower than the yearly growth in revenues in the EEMEA region (at an annual growth of 5.7%). The operating profit margin in the Asian region is also the second highest only to the European Union. This puts the Asian market among the top in terms of profitability and growth for this company. Philip Morris is likely to further grow its business in Asia including in Japan, Indonesia, China, and Korea so that one could benefit from this growth that will reflect in the company’s stock price.