China consumer stocks still good for growth
Dented results at Hong Kong listed retailers have not diminished the outlook for Chinese focused durable goods consumer sector stocks, analysts say. On the contrary, such stocks appear to be a rare bright spot in markets battered by fears about China’s sluggish growth and rising bad bank debt.
Third quarter results for China listed A-shares saw 6.7 per cent year on year growth in consumer discretionary and 5.8 per cent growth in consumer staples, Credit Suisse analysts wrote in a recent report that was otherwise downbeat about the economy.
Encouraged by the “resilient” results and the government’s stated focus on developing a consumer led economy, the Swiss bank upped consumer weightings in its A-share portfolio from 34 per cent to 52 per cent.
Income growth and household spending data “are still strong and have not slowed down to date,” said Michelle Leung, head of China focused money manager Xingtai Capital Management.
Post financial crisis and a lot of durable goods consumer stocks were stuck with excess inventory and an over-stretched sales network that forced the sector into a painful restructuring process which it only recently emerged from, said Leung, who favours apparel and sportswear makers and holds shares in Anta Sports Products, Li Ning and Peak Sport Products.
Investors need to focus on companies that have already tightened their belts, analysts said. By comparison, the auto sector is just starting to grapple with over capacity after years of hyper growth came to an end, while in Hong Kong, luxury retailers like Luk Fook Holding and Chow Tai Fook face broker downgrades and profit warnings after expanding too quickly on the back of once well-heeled mainland Chinese visitors to the city.
Leung’s comments chime with a recent Westpac MNI China Consumer Sentiment Indicator, which rose 3 per cent to 113.1 in November, after earlier falling sharply in line with the summer market crash.
Chinese consumers are optimistic about the outlook for household finances and are more likely to spend more on shopping and entertainment, wrote Westpac’s senior economist Matthew Hassan. “The lift in sentiment is a welcome development...we viewed last month’s sharp drop as mainly an overdue correction bringing Chinese consumer confidence more in line with the softer tone coming from other economic data,” he said.
Analysts say sector growth will in part be driven by China’s rapidly expanding e-commerce sector, which is helping drive down prices and accessibility to products, especially for rural residents.
In the medium term the consumer market will also be boosted by an extra 3 to 6 million babies a year after China ended its restrictive one-child policy, Credit Suisse data shows; boosting consumption by between 120 and 140 billion yuan, or 4 and 6 per cent of total retail sales.