In the last of our ‘Five reasons to invest in China’ series, we look at ‘aspiration’ – how rising wealth and a growing aspirational middle class will drive demand for premium goods and services over the coming decades.
A slow start
It’s fair to say the post-Covid recovery in consumer spending has not been as explosive as many hoped. Disappointing data since April suggests shoppers are reluctant to spend their lockdown savings (estimated to top US$2.6 trillion in 2022 alone). Concerns about the economy and the property sector are weighing on sentiment.
Nonetheless, look beyond the headlines and you’ll see a spending revival is underway. Demand is rising in areas like restaurant services, auto sales and online goods. On the ground, company management teams are reporting encouraging customer footfall numbers. On top of this, tourism is hovering near 2019 levels, while holidaymaker spending per person has further to run.
Trading conditions have also improved. During Covid-19, companies had zero visibility on demand. Many retrenched, keeping prices low while suppressing wages and bonuses. The economy, however, is again open for business. This clarity should allow firms to fully implement their business plans, increase prices and deliver on earnings. On top of this, many companies are running down inventories, which should lead to new capital expenditure spending towards the end of the year.
These factors could spur job creation and wage growth – further restoring consumer confidence in the economy and leading to a meaningful recovery in spending in the coming months and into 2024.
That said, while we expect the consumer recovery to pick up pace, not all companies are equal. As investors, we focus on quality companies with robust balance sheets, strong management teams and clear paths to earnings growth.
How does this look in practice?
Take Fuyao Glass Industry. It produces glass products for automobiles and trains. Demand for autos tumbled throughout strict pandemic curbs, while supply-chain issues weighed on the whole sector. But with lockdowns easing, demand for vehicles should return, and production looks set to kick into gear. With over 60% domestic market share, Fuyao is well placed to capitalise on this renewed motor enthusiasm, particularly in the fast-growing electric vehicle space. Recent robust results enhance our conviction in the stock. For investors, three years of underperformance means the stock is potentially trading at an attractive price relative to its prospects.
With China’s citizens again back in the office, commuting and socialising, we also expect a renewed appetite for beverages, foods, and snacks. Enter Chacha Foods. It’s China’s leading player in the roasted seeds and nuts market, with a widely recognised brand. The company has an established offline nationwide network, with over 1,000 distributors serving 400,000 sales terminals. It also has partnerships with hot pot, fresh fruit and stationery shops across numerous provinces. This excellent coverage and reputable name mean sales could potentially flourish as we head into next year and beyond.
Another name to highlight is Proya, which researches and markets beauty and personal care products. Cosmetics is a competitive industry, with numerous international players vying for the attention of China’s consumers. However, Proya targets younger consumer groups in lower-tier cities with good-value products. It does so through both physical and online channels. Proya’s sales strategies focus on continual product upgrades and innovation, including key opinion-maker marketing and rapid online updates. This strategy helped it weather lockdowns and emerge stronger. Thanks to good brand recognition, expanded product mix and ongoing investment in research and development, we believe the next few years look promising for Proya.
What’s the long-term outlook?
We believe the rise of the Chinese consumer is a long-term story. One of the government’s stated aims is to become a moderately prosperous nation by 2035. To achieve this, it’s launched policies to support self-sufficiency and domestic consumption. We expect to see more of these in the years ahead.
The country is also investing big in technology and innovation, notably in green tech, telecommunications, robotics and more. Urbanisation continues apace. All of these should potentially feed through to better jobs and increasing household incomes. This should further boost spending as the growing middle classes seek to improve their lifestyles. Indeed, by 2023, China could be home to some 400 million upper-middle and higher-income households (roughly as many as in Europe and the US combined*). Companies that can tap into this demand could potentially flourish.
Importantly, many of these opportunities are available to overseas equity investors. The recent market sell-off also means valuations are historically low. That’s why we think now could be the time to invest in China’s long-term recovery story.
*McKinsey & Company November 2021
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
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