SHANGHAI: Elvia Sun, a 24-year-old Shanghai advertising executive, spends most of her 3,500 yuan ($453) monthly salary on dining, foreign fashion labels and cosmetics.
She’s one of China’s 480 million “Little Emperors,” those born after 1979, when then-leader Deng Xiaoping began opening up the Soviet-style economy and limiting each family to one child. Like most of her generation, Sun favors non-Chinese brands such as L’Oreal SA’s Lancome cosmetics over local labels like Shanghai Jahwa United Co.’s Maxam line of skin care products.
“I’ll start buying local brands one day, when their quality improves,” said Sun.
Investors including Zhang Ling are already positioning for that shift. In the process, they have bid up Chinese consumer shares to Internet-bubble levels of 169 times earnings.
“I strongly favor consumer stocks, as China is so big and populous a country that the potential for consumption is enormous,” said Zhang, who manages the equivalent of $1.1 billion at ICBC Credit Suisse Asset Management Co. in Beijing. “It’s just a matter of time before China has its own giant consumer-related companies.”
He’s buying Yantai Changyu Pioneer Wine Co., the country’s biggest vintner, and Jahwa United, its largest listed cosmetics maker.
Two indexes of Chinese consumer staple and discretionary stocks have leapt 27% this year in Hong Kong dollar terms, the biggest gainers among the 10 groups that make up Morgan Stanley Capital International’s China Index. The 84- member China index is up 3.3%, while MSCI’s Asia-Pacific Index has climbed 5.3 %.
China’s economy, the world’s fourth biggest, has grown an average 9% over the past decade, while average wages have increased about 14% a year. Retail sales rose 15.3% in the first quarter of the year, the statistics bureau said on April 19, as the economy expanded a faster-than-expected 11.1%.
“The attitude toward spending among young people has changed, probably because of the one-child policy,” said Zuo Xiaolei, chief economist at China Galaxy Securities Co. in Beijing. “This generation never had to worry much about money, nor did they ever have to share.”
Market researcher ACNielsen’s 2006 China Trend Watch report by Kenneth Lee and Joey Chan declared: “The Reign of the Little Emperor Has Begun,” referring to China’s one-child generation.
“Little Emperors have grown up on a steady diet of foreign brands and western notions of consumption which they have happily adopted. Their voracious consumption will be the backbone of continued growth across China,” the report said.
Sun’s monthly salary, for instance, is about 100 times that of a generation ago and matches the average annual income of rural people, who make up two-thirds of China’s 1.3 billion population.
China has yet to conceive consumer brands that rival Western companies in its own market. The country boasts no equivalent of Oak Brook, Illinois-based McDonald’s Corp., the world’s biggest restaurant chain with 789 restaurants in China, or Atlanta-based Coca-Cola Co., the world’s biggest soft-drink maker, for instance.
The country’s younger consumers are more likely to favor non-Chinese brands, Credit Suisse First Boston said in a book published in 2005 entitled “The Rise of the Chinese Consumer.” For example, 16 percent of 20-29 year olds mainly drink foreign beers, compared with 5 percent in the 50-59 age bracket.
“Foreign brands are better managed, advertised and designed than local competitors,” said Qiu Zhicheng, an analyst at Haitong Securities Co. in Shanghai. “Young people link foreign brands with a sense of superiority and fashion.”
Just three of the 20 biggest companies in China’s benchmark CSI 300 Index are consumer companies. That compares with seven members of the Dow Jones Industrial Average in the U.S. Private consumption in China accounts for 35% of gross domestic product, about half the share in the US.
Yan Ji, an investment manager at HSBC Jintrust Fund Management Co. in Shanghai, says the current valuations of consumer stocks aren’t justified.
The 251 mainland-listed consumer stocks trade at an average 169 times current earnings, while the Nasdaq Composite Index peaked at 198 times earnings before the Internet crash that began in March 2000. The 300 biggest companies in China’s CSI index trade at 40 times, according to Bloomberg data.
“I would rather take consumer stocks off my radar screen and look for other bargains,” said Shanghai-based Yan, who helps manage about $517 million. “One factor tends to be overlooked: the supply side of consumer goods is also strong. That will translate into intensified competition and hurt profit margins.”
‘Where the Action is’
Jerry Lou, Hong Kong-based China strategist at Morgan Stanley, recommends investors buy shares of Hong Kong-listed China Mengniu Dairy Co., the country’s largest liquid milk producer, Lenovo Group Ltd., maker of its top-selling computer, and Tingyi (Cayman Islands) Holding Corp., its biggest packaged- food maker.
The mainland stock market’s two-biggest consumer shares have leapt in the past year. Wuliangye Yibin Co., the biggest spirits maker, has more than tripled, while Kweichow Moutai Co., the maker of Moutai, the fiery liquor used at official banquets, has more than doubled. The two companies have the biggest representations among consumer stocks in the CSI 300 Index, ranking 13th and 16th.
Some smaller consumer companies have also been rising.
Li Ning Co., a Chinese sportswear retailer, has gained 28 percent this year in Hong Kong. The company, which uses NBA’s Shaquille O’Neal to promote its brand, said last month net income for 2006 jumped 58 percent from a year earlier. Li Ning was founded by the former world gymnastics champion of the same name.
Changyu Wine has climbed 14 percent this year in Shenzhen. Earnings rose 42 percent in 2006 as higher incomes boosted spending. Jahwa United has surged 80 percent this year in Shanghai. Net income for 2006 jumped 91 percent from a year earlier.
“The consumer economy of China is where that action is,” said Robert Theleen, chairman and co-founder of investment capital firm ChinaVest in Shanghai. “Companies in sectors that drive that are going to be very attractive to look at.”