China through the US Looking Glass

Having just returned from a fortnight in the US, we were struck by the headlines relating to China. Not so much about the trade friction, this has been reported for some time, but rather the headlines focusing on the perceived slowdown in China. On several occasions during the trip, the Wall Street Journal drew attention to slowing sales at US companies with exposure to the Chinese market, with some firms struggling with weaker demand from export manufacturers in the region. A double page spread cited the fall in sales from a company the manufactures batteries for forklift trucks, as a prime example of this trend.

Our investment approach concentrates solely on the consumer, so what Chinese exporters are doing is not our number one concern. Admittedly, the fall in car sales at GM is of more relevance to our take on things, but there are some specific reasons why auto sales have been soft (the removal of incentives by the government. See our recent piece on China – Our View from China). Meanwhile Proctor & Gamble, Estee Lauder, Starbucks, Tiffany, LVMH, L’Oreal, Nike, Fast Retailing and Sketchers to name a few, all highlighted China as an area of strength in Q4, particularly in e-commerce sales.

On our final day in the US, we noticed Nestle announced their results, pet food and KitKats apparently flying off the shelves in China, adding the Swiss giant’s name to this list of companies for whom the Chinese consumer is very definitely alive and well.

But as you know, our approach is to invest in local champions (North Americans are more than capable of investing in Chinese multinationals for themselves) and here the picture remains very robust. In fact, one of our investments, Baozun (end-to-end e-commerce solutions), counts many of those listed above as clients and will be enjoying this strength.

Two of the major holidays in China made for interesting reading. Last November, Year-over-year (YoY) sales growth on Singles Day was down, but still up a very healthy 27%. Chinese New Year saw more tourists visit the hotspots of Macau, up 27%, and Hong Kong up 36%. So, while retail sales growth may be softening somewhat on a YoY basis, we read it more as a change in consumption behaviour. Services, experiences and convenience are superseding merchandise as the consumption driver, as exemplified by strong results from Huazhu (hotels), China International Travel (tourism), and Alibaba (e-commerce) in January.

“Premiumization” (the upgrading of goods and services purchased as incomes and aspirations grow) is also in evidence as shown by companies such as Robam (extractors/fancy range hoods), Mengniu and Health & Happiness (both dairy). So too consumption growth in China’s second and third tier cities, as experienced by our holding Greentree (Hotels).

We spent a lot of time testing our forecasts in China and elsewhere in the Emerging Markets universe over the past year. With one or two exceptions, the local champions in which we invest for our shareholders remain in a very robust position with the result that our portfolio is trading on one of the lowest price/earnings to growth ratio we have seen in the last seven years.

Of course, cheap stocks can always get cheaper if sentiment remains toxic. Whilst the headlines in the US do not suggest any boost to sentiment, evidence on the ground looks to be turning up, and we would argue that the companies in our portfolio offer a very good medium-term proposition.


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