HONG KONG -- Despite a sluggish start to the year for shares in Hong Kong, there is one young sector that is showing big gains in the first week of 2008: Olympic "theme" stocks.

Traditionally, theme stocks have been defined as those companies whose earnings investors think will get an uplift from the mass of tourists flooding into Beijing in August, such as Air China ( AIRYY), for the summer games.

Recently, however, the sector has expanded to include companies that are more loosely related to the games, say market participants. The speculation has created a rush to find the next hot stock, and propelled some of the original theme stocks into orbit.

"Investors are chasing the share prices of any stock that is related to Beijing, or with the word Beijing in the name," says Richard Lee, an analyst at Core Pacific Yamaichi in Hong Kong. "Even second-liners, like Beijing textile companies which are less relevant to the Olympic games, are up strongly."

Lee says that the key companies benefiting right now from the buying frenzy are mainly sportswear makers and travel companies, but others such as Beijing Media ( BJGMF), are also favorites.

While the Hang Seng has declined 2.5% so far this year to 27,112, this increasingly arbitrary group of companies has posted stellar gains, in some cases hitting record highs. For example, China Dongxiang ( CDGXF), a maker of sportswear in mainland China, has risen 7% so far this year to HK$6.20. The shares listed last October and hit an intraday record high of HK$6.38 on Monday.

Other Chinese mainland sportswear makers listed in Hong Kong have fared well, too. Li Ning ( LNNGF) has gained 2.2% to HK$29.75, while Anta ( ANPDF) has jumped 7.5% to HK$11.70.

"Investors think Chinese people will exercise more with the games coming, and that will stimulate demand for sportswear," says Andrew Toh, head of sales and research at Tai Fook Securities in Hong Kong. "These concept stocks are in a 'honeymoon' period until the games."

Travel-related stocks have also fared well. Shanghai Jin Jiang International Hotels ( SJJIF) has surged 17% to HK$3.73 this year. Although the company is not based in Beijing, investors are betting that tourists will take the one-hour flight down to the red hot financial center of China after the games, say dealers.

China Travel ( CTVIF), a Hong Kong-based holding company engaged in tourist operations from transportation to managing golf clubs, is another beneficiary of theme buying at a distance from China's capital -- in the last week, the stock has leaped 9.3% to HK$5.62.

"Theme stocks are looking more and more expensive now," cautions Andy Lam, an associate director of Harris Fraser in Hong Kong. Lam says that investors who want to invest on a theme basis are best off buying Air China, which will see increased sales over the summer period, and is more stable than others.

Shares in Air China have fared poorly in the past week though, due to speculation about a potential bid for China Eastern Airlines ( CEA). This year, the stock has fallen 14.3% to HK$10.20, which some say makes it one of the few cheap companies among the sector right now.

Also on the theme radar is Beijing Media, which although only loosely related to Olympic revenue, jumped 7.64% on Tuesday to HK$5.92. The stock has soared 18.4% in the last week.

Tai Fook's Toh cautions investors that most theme stocks have very small market capitalizations, and that as a result, sharp swings of 10% or 20% in the price of these stocks are common. For U.S. investors, the risks are higher still, since many of the ADRs of the theme stocks are highly illiquid, and it may be safer to buy the Hong Kong-listed shares.

Toh also forecast periods of heavy profit-taking before the Olympics. For example, Beijing Media's tiny $325 million market cap made the stock vulnerable to declines of 30% in the last half of 2007, and despite recent gains, the stock is still around 40% off its 52-week high as a result of the selling.

He recommends buying theme stocks that will grow regardless of the Olympic games, which he says will be the sportswear makers.

"Even without the Olympic games concept, you're talking about 1.3 billion people in China with a demand for sportswear, which should retain a high level," he says. "It's a safer bet."
Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at www.theglobalperspective.biz. He lives in New York.