Dear Fellow Investor,

I hope you enjoyed your Thanksgiving holiday last week. There's no question we have a lot to be thankful for in America. It is my hope that Chinese citizens will one day enjoy the same freedoms we do. Much progress has been made, but much more is needed. I'm confident we'll see that progress in the coming years, and that it will help fuel the staggering investment opportunities I expect to come our way.

So tell me, were you among the brave folks who hit the stores the Friday after Thanksgiving? As usual, the news reports that day were filled with stories of people lining up before dawn to be among the first to take advantage of deep discounts—and then they run over each other when the doors open.

That's not my idea of a good time, but it obviously works for a lot of people. I prefer to wait a little bit to start my shopping when it's a little quieter. That's what I did last year, and I remember well what I saw: The high-end designer boutiques in L.A. were practically empty while the Apple stores selling iPods and Macs were mobbed. The then-new iPod nano was especially hot.

In addition to Apple products, shoppers eagerly bought other consumer electronic items like smart phones (that combine cell phone, PDA and PC functions), plasma televisions, MP3 players (like the iPod), digital cameras, PDA organizers, Xbox 360s, notebook computers, and so on. Many of those same items will be popular again this year, and two new video game consoles are especially hot: Sony's PlayStation 3 and Nintendo's Wii.

The China Factor

All of these busy holiday shoppers may not be thinking about China when they buy these gifts for their loved ones, but as investors, you and I should be. Why? Two reasons. First, China has surpassed Japan as the leading manufacturer of portable consumer electronics in the world. And second, the explosive growth of manufacturing in China is the main reason prices everywhere have dropped so dramatically.

Remember the introduction of the DVD player? It cost $800 to buy one eight years ago—until Chinese companies started making them. Then the price plunged to $150 almost overnight, and everybody bought one. Now you can buy one for as little as $35. A five-megapixel digital camera that cost $700 three years ago now goes for as little as $300. The average notebook computer had a hefty price tag of $1,800 in 1998; now you can buy one that's eight times as powerful for half the price.

These cheaper prices are a direct result of lower manufacturing costs in China, and they are driving demand worldwide. On top of that, China's citizens are also consumers of these electronic devices in ever-increasing numbers, so you can see why this is such a big deal.

How to Profit

What does this mean for us as investors? As always, there are both exciting opportunities to take advantage of and pitfalls to avoid.

Let's start with Apple (AAPL). I expect this to be the third consecutive holiday season in which iPods sell like hotcakes. Did you know that all of Apple's iPods are made in China and Taiwan? CEO Steve Jobs is a master at leveraging China's low-cost manufacturing capabilities. Apple designs its products at its headquarters in Cupertino, California, and then outsources the manufacturing to China. This keeps profit margins impressively high.

I've been recommending AAPL to my China Strategy readers for some time now, and the stock has taken off—up 81% in just a little over four months! It's a great example of a U.S. company producing big profits thanks in large part to China's growth. (For immediate access to all of my recommended stocks, click here to join China Strategy today at special discounted prices.)

Apple's products, and in fact all consumer electronics, require semiconductors to function properly. As an investor, you should be aware that there are both excellent opportunities in this sector as well as black holes that will swallow your money.

For example, China is now the world's fastest-growing semiconductor market, so unsuspecting investors listening to the "experts" on Wall Street might be investing in some of the Mainland Chinese companies like Semiconductor Manufacturing International (SMI).

That would be the worst thing you could do. Mainland Chinese semiconductor companies are almost always bad investments. They have all fared poorly, despite the growth of their industry, because they focus on low-margin services like contract manufacturing. Plus, the competition is so fierce that profits are reduced even more. In the last two years, SMI is down 49% (Apple has almost tripled in that time). Take my advice: Stay away from Mainland Chinese semiconductor stocks.

The Semiconductor Stock to Own

Not all semiconductor stocks were created equally, and there is one that I believe is a good opportunity right now. I made it a special to point to visit the company on my last trip to China, and what I learned convinced me that this company will remain the world's dominant semiconductor maker for the foreseeable future—something I wanted to be sure of before recommending the stock to my readers.

You can think of this company as the ultimate arms dealer in the semiconductor industry because it makes chips for clients who are often in competition with each other. The client list reads like a "who's who" of global semiconductor giants: Intel, Texas Instruments, Nvidia, ATI, etc.

Now is a good time to buy the stock. The end of the year is almost always the strongest for tech stocks, and the holiday season should provide a nice boost for this industry leader, which supplies chips for many of the hottest consumer electronics products. (Click here to learn how you can get my very latest advice on this and all of my recommended stocks when you join China Strategy today.)

Sincerely,

Robert Hsu
Editor, China Strategy

P.S. Speaking of consumer electronics, I expect China to roll out its new 3G cell phone network next year, and my brand new stock recommendation is in prime position to benefit. I will be releasing this recommendation tomorrow with the December issue of China Strategy. Click here to join today and you'll be among the very first to learn about this exciting opportunity before the hype picks up.