21 June, 2021
There’s so much in the news surrounding China right now, so we thought we’d dedicate this briefing to outlining what we think is the bigger picture for global equity investors when it comes to Chinese domestic consumption.
Over the last 20 years, through industrialisation and becoming the manufacturer of the world China has all but eradicated poverty – a phenomenal feat. The next decade and beyond will see China increasingly pivot to a consumption and services driven economy as powerful shifts in demographics continue.
Today, China has around 26 million premium households which have a developed world average income. But we see this growing to 100m households by 2030 – and the combined income of these households growing from US$2 trillion to $8 trillion.
A new breed of high-powered consumer is emerging, and they’ve got a lot of spending power.
And it’s not only premium households. All households in China are getting wealthier and consumption habits are changing.
Home-grown champions are emerging
In recent times, tech and trade wars are continuing to prompt China to focus on developing its domestic economy.
We’re also seeing a rise in nationalism.
This is powering a breed of domestic brands. Their product quality is equal to foreign peers and they have strong brand recognition domestically.
In the past companies like Starbucks, Nike or Adidas provided investors exposure to China’s growing domestic economy, but the dynamics are rapidly shifting. We expect these home-grown champions to take market share.
We want exposure to beneficiaries of these powerful demographic and consumption trends via e-commerce platforms, premium goods, travel, financial services – and we want to take that exposure via domestic brands that will be market share winners.
Finding winners as new retail trends emerge
Over the last decade or so, much has been said about the rise of e-commerce in China. E-commerce was adopted faster in China than parts of the developed world because of a lack of modern retail outlets, plus it’s helped that logistics costs in China are amongst the lowest in the world which is partly due to population density.
But investors can never set-and-forget. The retail landscape continues to evolve.
One trend we’re watching closely is the emergence of ‘community group buying’, which looks set to change the way fresh food and pantry staples are bought in China. Instead of making multiple trips to the wet market each week customers can place their grocery order online and need only go to a nearby pick up point to collect their goods.
Today, two companies are leading the charge – Meituan and Pinduoduo – with a combined market share of almost 50%. The platforms are still sourcing fresh produce from a local wholesaler but it’s already cut out several layers of distribution. The end goal is for the platforms to source directly from the farmers, and we can see an opportunity to expand into more product lines.
With grocery estimated to be a US$2 trillion market, the scale of this opportunity is large. We think community group buying can take 10% of China’s grocery market over the next five years, with share likely to remain relatively consolidated around a few key players that are already making the investment in warehouses, trucks and systems to gain scale.
In taking exposure to the Chinese consumer don’t wed to old favourites. New winners are emerging in retail and e-commerce.
Meituan is held across our portfolios, while the Antipodes Asia Fund provides exposure to both Meituan and Pinduoduo.
Antipodes Asia Fund Portfolio Manager, Sunny Bangia will be providing a deep-dive into the opportunities in China in the next episode of our Good Value podcast, due to be released in the coming days. You can subscribe on Apple, Google or Spotify.
A stock in focus | Trip.com Group
We’ve recently initiated a position in Trip.com – an online travel agency, much like Expedia. It has almost half of online domestic travel in China but dominates international travel, with around 70% share. In more normal times, half of the international travel from China is still to Macau, Hong Kong and Taiwan, so the growth opportunity in international travel is still very large.
As incomes increase, so too will holidays and business trips to places like Japan, South Korea, South East Asia to name just a few. And most trips are still booked through traditional tour agencies – only 15% of flights are booked online.
Trip.com can be a reopening play as travel bubbles open, and a longer-term growth opportunity as spend on international travel increases in line with household wealth and as more Chinese book travel online.