In the first in a series of articles on key Chinese investment themes, Charlie Awdry and May Ling Wee, China equity portfolio managers, discuss the consumption story, which remains steadfast as economic growth stabilises. The managers explain why they think investors with a selective approach can capitalise on this long-term progressive trend and share some of their stock picks for the sector.
Wage growth fuelling consumption upgrade
Affluence levels in China have risen at an impressive rate over the years. A domestic worker earning a monthly wage of RMB800 just a decade ago now makes between RMB6,000-8,000 monthly. While the absolute value may not be considered large relative to wage growth in other developing markets, more impressively, the trend shows no sign of slowing despite a gloomy global backdrop.
According to a 2016 study conducted by human resources consulting firm, ECA International, Chinese salaried workers can expect to see an average salary rise of 6.5% in 2017. Although the figure represents a more subdued rate of growth from previous years, it far outpaces the 1.5% global average growth reported in the same study.
Greater focus on lifestyle
Millennials/young-generation Chinese (18 to 35 year-olds) are poised to overtake those born in the 50s, 60s, and 70s as the dominant force in the Chinese consumer market. This particular demographic of Chinese consumers bypassed the periods of economic hardship experienced by their predecessors who have tended to be more frugal. In general, the millennials’ growing purchasing power, looser hold on purse strings, and greater appreciation for work/life balance are driving the demand for lifestyle and well-being products and services.
The development is reflected in the findings of a 2015 joint research project between Chinese online retail giant, Alibaba and the Boston Consulting Group, which found that young generation Chinese tended to be more sophisticated consumers than those older than 35. They are eight times more likely to be college graduates, travel overseas twice as much and have more brand affinity than older Chinese and even US consumers of the same age group. In fact, consumption by young-generation Chinese is growing at twice the pace of consumers older than 35 and the share of total consumption is projected to increase from 45% to 53% by 2020.
Domestic travel on the rise
Chinese domestic travel, both for business and leisure, is at a high according to the China National Tourism Administration. Data from the government agency charged with developing the country’s tourism sector showed that domestic travellers took 4.44 billion trips in 2016, a year-on-year increase of 11%. The corresponding revenues from these trips totalled RMB3.9 trillion. Domestic business travellers contributed significantly to this amount, according to November 2016 data from the Global Business Travel Association. Total business travel spending this year is expected to increase 8.4% from 2016, bringing total Chinese business travel spend to US$344.6 billion.
But leisure travellers are the ones set to really drive domestic travel spending as more local businesses adopt the annual leave system. This, combined with an ever expanding high speed train network, is enabling the Chinese to take more short distance leisure holidays.
Total business travel spending - China
Source: Global Business Travel Association. Data at November 2016.
Domestic travel expenditure growth (2007-2015)
Source: China National Tourism Administration, US Travel Association, Morgan Stanley Research, data at December 2016.
CAGR = compound annual growth rate
A boon for budget hotels
© Huazhu Hotels Group Ltd
Among the holdings in our portfolios that are benefiting from the trends driven by China’s continued consumer strength is hotel chain operator, China Lodging. China’s largest economy hotel chain, it manages, operates and franchises close to 3,000 hotels across 12 brands in the economy segment, the mid-scale segment, the upper-midscale segment and the upscale segment. China Lodging not only counts the likes of Alibaba and mobile phone manufacturer Huawei among its corporate customers, but also has an increasing base of mass urban customers with a growing affinity for leisure travel.
In January 2016, China Lodging completed a share and asset swap agreement with international hotel operator, AccorHotels. The deal effectively gave the mainland company greater access to middle and upscale hotel markets, which are outperforming the budget segment as Chinese consumers demand more. At the same time, China Lodging is continuing with its room upgrade programme for its Hanting budget economy hotel brand.
Today, China Lodging is concentrating on developing new hotels in first and second tier cities where demand is holding up much better than the commodity/heavy industry-based lower tier cities. In addition, the company is bolstering its brand portfolio with new acquisitions and hotel upgrades. China Lodging achieved an impressive five-year sales compound annual growth rate (CAGR) of 28% and earnings before interest, tax, depreciation and amortisation margin (EBITDA) of 22% (data at October 2016).
Growing 'athleisure' segment
Buoyed by the same factors, mass market ‘athleisure’ or athletic wear worn for leisure, has emerged as an attractive sector as a growing segment of Chinese consumers joins this global trend. As a result, athletic wear sales in China are expected to grow steadily in the coming years, with government-led initiatives and Chinese consumers’ desire for a healthier lifestyle leading the way.
At its current rate, the total market size for the sector is expected to reach RMB3 trillion by 2020, or approximately 12.5% CAGR, according to data from Credit Suisse.
Anta Sports is one company that is expected to benefit from the rising trend for ‘athleisure’. The company has led its domestic peers in brand and product differentiation and, just like its global counterparts, Anta is convincing Chinese consumers in lower tier cities of the need for different equipment for different sporting activities. The company is seeing success on this front partly due to the consumption upgrade.
With its network of 7,000 retail points throughout China, Anta Sports looks strongly positioned to capitalise on the millennials’ growing appetite for health and lifestyle-related products and services. The sportswear giant recorded 18% cash flow return on investment (CFROI) as at October 2016, according to Credit Suisse data.
Source: UBS, Euromonitor, data at September 2016.
© Anta Sports Products Limited
Chinese consumer tastes and demands are evolving in step with rapidly rising affluence levels. Travel and leisure are just two examples of sectors expected to benefit from this trend. We believe that our strategic focus on well managed, cash generative companies focused largely on the consumer is well suited for prospering in China’s new economy. Investors are starting to realise that many Chinese companies are delivering profit growth and share price returns despite macroeconomic issues, and they can continue to do so.
Note: references made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.