http://www.telegraph.co.uk/finance/comment/tom-stevenson/9247958/Its-Chinas-mass-market-that-offers-the-best-opportunities.html
http://www.telegraph.co.uk/finance/comment/tom-stevenson/9247958/Its-Chinas-mass-market-that-offers-the-best-opportunities.html
https://www.fidelity.co.uk/investor/news-insights/fscc-china-trip.page
It's China's mass market that offers the best opportunities
One of the things which surprised me as I walked round a WuMart supermarket in Beijing recently was the number of Western brands on the shelves. Pampers, Quaker Oats and even Blue Nun wine at an eye-watering £18 a bottle jumped out.
Shoppers queue to pay at a
supermarket in Hefei, eastern China. Photo:
AFP
8:00PM BST 05 May 2012
20 Comments
With that fresh in my mind, I was not remotely surprised last week when
Bright Food, one of China's largest food groups, snapped up 60pc of Weetabix –
the Chinese appetite for Western products is far from restricted to luxury
brands.
In fact, the evidence from my spin round China with my colleague Anthony
Bolton a couple of weeks ago points to the real consumer growth story being at
the bottom end of the market. Yes, the likes of Burberry, BMW and Louis Vuitton
will do well in the newly-affluent, brand-conscious mega-cities that places such
as Shanghai have become in recent years. Indeed, a luxury car dealership I
visited projects 30pc annual growth into the future.
But I think the better opportunities will be found among companies catering
to the millions who, for the first time, are buying packaged instant noodles,
eating out in Japanese-style Ramen restaurants or upgrading to the Chinese
equivalent of a Travelodge.
I talked to the managements of companies operating in all three of these
markets and the outlook they described was very bright indeed. I heard similar
stories from a high-end cosmetics chain and an upscale department store but the
evidence of my own eyes made me more excited by the mass market opportunity.
I'd no sooner got back to London than Goldman Sachs sent me a research note
describing exactly what I'd seen for myself.
Splitting China's 600m strong urban population into income bands, its
conclusion is that the mass market (with earnings of between £150 and £400 a
month) provides the best long-term growth prospects and more reliable,
structural rather than cyclical, growth too.
As the mass market accounts for around three quarters of city-dwellers, boosted by millions of migrant workers in recent years, the growth potential for products such as a humble British breakfast cereal is immense.
As the information overload of a week in China settles, one of my main conclusions is that sometimes we over-complicate investment. Having visited around 20 companies and spoken to many other experts on the Chinese economy, I understand the concerns about China – inflation, bad debts, over-investment – but the sheer scale of the transformation of a country of 1.3bn people from an export and investment-led economy to a domestic consumption-driven one trumps these.
As one of many articulate and impressive business leaders I had the opportunity to talk with put it, "everyone says China is difficult to read, but it's actually the simplest country in the world to understand. You just have to look at the Five Year plan".
The latest of these makes quite clear that the Government is guiding the economy to a slower and more sustainable rate of growth (although at around 8pc a year, one we'd certainly settle for), a much reduced dependence on infrastructure investment and a massive increase in the spending power of the ordinary worker.
The minimum wage will increase by 15pc a year for the next five years, which will double the incomes of low-earners and bring a bowl of Weetabix within the reach of millions.
Mass market consumption will benefit from two other factors: the ongoing urbanization of China, which has some considerable way to go, and improvements in the social safety net, the absence of which has been a driver of China's extremely high savings rate. In the five years to 2010, government spending on healthcare, for example, rose more than three-fold.
As one China strategist told me, the fact that household consumption is still a small part of China's GDP merely reflects the 25pc annual growth in investment over the past nine years. China "will continue to be the world's best consumption story for everything from instant noodles to luxury cars".
This does not mean that profiting from China's rapid growth will be easy. The one thing that is abundantly clear from a visit to China is that it is different – different priorities, different standards of corporate governance, a wholly different relationship between the individual and the state. That means there is no substitute for kicking the tyres on the ground and doing plenty of due diligence. I would be surprised if long-term outperformance did not make it worth the effort.
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63
As the mass market accounts for around three quarters of city-dwellers, boosted by millions of migrant workers in recent years, the growth potential for products such as a humble British breakfast cereal is immense.
As the information overload of a week in China settles, one of my main conclusions is that sometimes we over-complicate investment. Having visited around 20 companies and spoken to many other experts on the Chinese economy, I understand the concerns about China – inflation, bad debts, over-investment – but the sheer scale of the transformation of a country of 1.3bn people from an export and investment-led economy to a domestic consumption-driven one trumps these.
As one of many articulate and impressive business leaders I had the opportunity to talk with put it, "everyone says China is difficult to read, but it's actually the simplest country in the world to understand. You just have to look at the Five Year plan".
The latest of these makes quite clear that the Government is guiding the economy to a slower and more sustainable rate of growth (although at around 8pc a year, one we'd certainly settle for), a much reduced dependence on infrastructure investment and a massive increase in the spending power of the ordinary worker.
The minimum wage will increase by 15pc a year for the next five years, which will double the incomes of low-earners and bring a bowl of Weetabix within the reach of millions.
Mass market consumption will benefit from two other factors: the ongoing urbanization of China, which has some considerable way to go, and improvements in the social safety net, the absence of which has been a driver of China's extremely high savings rate. In the five years to 2010, government spending on healthcare, for example, rose more than three-fold.
As one China strategist told me, the fact that household consumption is still a small part of China's GDP merely reflects the 25pc annual growth in investment over the past nine years. China "will continue to be the world's best consumption story for everything from instant noodles to luxury cars".
This does not mean that profiting from China's rapid growth will be easy. The one thing that is abundantly clear from a visit to China is that it is different – different priorities, different standards of corporate governance, a wholly different relationship between the individual and the state. That means there is no substitute for kicking the tyres on the ground and doing plenty of due diligence. I would be surprised if long-term outperformance did not make it worth the effort.
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63
Having just returned from a fascinating and stimulating trip to China with Anthony Bolton and a group of senior financial and personal finance journalists, I wanted to take the opportunity to share with you some of the key findings of our visit to Hong Kong, Beijing, Tianjin and Shanghai.
The group – comprising top journalists from The Times, Telegraph, Guardian, Mail on Sunday, Financial Times and Independent – joined Anthony Bolton on an intensive round of company visits in China’s key commercial centres.
The trip was an unprecedented opportunity to see Anthony at work, joining him in quizzing company managements on the outlook for their companies and the macro-economic context in which they operate. In total we had around 20 external meetings during a packed schedule that left everyone impressed by Anthony’s energy and enthusiasm for the Chinese investment opportunity.
The trip was put together by Fidelity and Morgan Stanley to demonstrate the scale and pace of economic development in China and to showcase Fidelity’s ability to capitalise on the rapid rate of change for the benefit of our investors.
Meeting the managers
The itinerary for the trip was different from most press visits and much harder work! Journalists were shown for the first time how Fidelity’s portfolio managers and analysts gather and assess information from company managements. Each day, the group visited four or five different companies.The sector focus reflected Anthony’s belief that the best investment opportunities in China are to be found among consumption-related and service businesses.
Companies visited included:
- Ping An Insurance – the largest holding in China Special Situations, Ping An has transformed itself from a small insurance company to an integrated financial services business in the past 10 years. Everything at Ping An is on a massive scale with tens of thousands of calls being made and taken every day in one of the world’s largest telemarketing operations. The quality of its systems is key, with every process having been redesigned and centralised for greater efficiency.
- China Lodging – a fast-growing chain of largely budget hotels, meeting the needs of an increasingly mobile Chinese population. Hotel chains control a tiny proportion of the overall lodging market in China, with significant potential to increase market share in addition to benefiting from the overall growth of the market.
- Ajisen – a fast-food operator specialising in Japanese Ramen-style noodle dishes. Ajisen is a classic Anthony Bolton recovery situation, having suffered a dramatic share price fall amid the adverse publicity caused by an earlier food safety scare.
- In addition, the group visited one of Beijing’s leading luxury car dealers, a major commercial property developer, television advertising media buyer, lottery company and drug developer. There were tours round a cosmetics retailer, department store and supermarket chain. To complement the focus on consumer and service sector stocks, the group also took a high speed train from Beijing to the new economic development zone in Tianjin to witness the creation of a high-tech hub and to visit the giant port that will serve it.
Findings from the trip
For anyone wishing to understand the scale of the changes underway in China, and the commercial and investment opportunity they represent, there is no substitute for time on the ground in this most fascinating of countries.Things that struck me during my week in China include the following:
- Not just the scale but the pace of change in the country. Both Beijing and Shanghai are huge, ultra-modern cities with excellent infrastructure. The high-speed train service between Beijing and Tianjin was fast, clean and smooth as silk. The ambition of the Tianjin economic development zone is breathtaking.
- The potential for companies that understand the changing nature of the Chinese market is enormous. The growth projections in, for example, the budget hotel market, or the fast-food sector, are on a completely different level from those in the developed world.
- The importance of not viewing China through the prism of Western ideas about, for example, democracy and personal freedom. Priorities are different, with stability and growth valued more highly than individual rights.
- The importance of conducting extensive due diligence in a country where the best companies are at least as good as the best in the West but others do not live up to the standards that overseas investors might expect.
- The impact of rising wages. The Government has mandated big increases in the minimum wage in its latest five year plan. This has important implications for companies and will affect them in different ways, depending on their exposure to labour costs and the extent to which they can benefit from rising disposable incomes. Stock-picking is key.
- The importance of taking a long view. China’s economy is growing fast, it is being transformed from an export and investment-led economy to one more focused on domestic consumption and services. But this process will take time and will not be smooth.
As an investor in Fidelity China Special Situations PLC, I hope you have found my thoughts useful. For me, it has been a fascinating insight into the world’s leading emerging market. I can’t wait to go back!
All the best
Tom Stevenson
Investment Director
