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‘China Slowdown’ Doesn’t Mean ‘China Shutdown’

There’s a lot of talk about a China slowdown hurting Western stocks, and with good reason.

Chinese equities have been slammed recently, falling to a three-and-a-half-year low in late September and soundly in the red year-to-date despite a broad rally for American indices. China’s manufacturing sector contracted for the 11th straight month, as measured by the HSBC PMI index. And the nation’s services sector — a key metric of the rising middle class and a transition away from manufacturing — saw one of the worst readings in nearly two years last week.

So is the China miracle over?

Maybe for some companies … but certainly not for all.

Take fast-food giant Yum! Brands (NYSE:YUM), which owns Pizza Hut, Taco Bell and KFC restaurants. The corporation now gets half its revenue from overseas and China plays a massive role. If China’s growth story was over, YUM stock would be hurting big-time, right?

Well, Yum! earnings reported Wednesday featured a 23% gain in Q3 net income thanks in large part to its fast-growing China operations. Overall, operating profit in China rose 22%, when adjusted for currency fluctuations.

This is in stark contrast to other companies that have anticipated weak demand in China. Back in September, heavy machinery manufacturer Caterpillar (NYSE:CAT) made waves by lowering its guidance through 2015 on fears of a soft global market. And just yesterday, aluminum giant Alcoa (NYSE:AA) reported mixed earnings that included reduced 2013 guidance thanks to — you guessed it — China demand.

Even that icon of American globalization, McDonald’s (NYSE:MCD), came out and said the China slowdown could affect growth metrics going forward.

So what is Yum doing right? Well, for starters, it has long been a believer in the China growth story. It is a leading brand thanks to rapid growth and early entry into the market. KFC alone has 4,000 stores in the nation, and Pizza Hut is growing fast.

McDonald’s, by contrast, is racing to get 2,000 locations in China by the end of 2013 — which would be well less than half the presence of YUM.

Growth has not abated, either. Yum! Brands said it expects to open at least 1,750 new restaurants outside the U.S. this year, according to Bloomberg Businessweek, which would be a record for the company.

Then, of course, there’s the unique positioning Yum restaurant brands have with China’s middle class. While heavy machinery from Caterpillar has a big price tag, the rise of the Asian consumer is a force that isn’t subject to the whims of industrial demand or Beijing stimulus.

The lesson here is that there isn’t quite the broad opportunity in China that there was in, say, the mid-2000s. However, a discerning investor still can find Western multinationals like YUM that are tapping into China growth with considerable success.

Take Amazon (NASDAQ:AMZN), which is seeing amazing e-commerce growth in China — particularly by tapping into the “gift industry,” which is so much a part of Chinese culture.

So while you have to be discerning and mindful of the China slowdown, it’s worth noting that this is not a region that is trouble for everyone. A small group of companies still is cashing in big-time on the China growth story — even if that growth isn’t what it once was for all of Wall Street.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Alcoa but no other stocks named here.

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