Reconciling The Consumer Story And Low Share Of Consumption In GDP?11 July, 2011, 19:02. Posted by Zarathustra
Tags: Consumption, Economy
If you go to one of those luxury stores in Hong Kong these days, the queues outside of those stores are mostly people speaking mandarin.
China consumer story is probably based on the fact that China needs to rebalance towards more of a domestic consumption driven economy. Or it is probably based on the fact that a tiny proportion of people in China who become very wealthy, and everyone sees that they keep on buying stuff, especially the higher-end stuff in Hong Kong.
I have long failed to understand the rationale for the consumer story, which has been extremely popular a year or two ago among the investment communities. Perhaps because I have never been a consumer stocks analyst, I just don’t get the story. In one of the earliest piece in which I voiced my growing scepticism of China growth story, I said that the China consumer story became a great story to play with…
as China has to be less reliant on export and fixed-asset investment to drive their economy, they have to sooner or later become more reliant on consumption spending. And Chinese government is committed to encourage consumer spending by introducing some subsidies, so investors should buy consumer stocks.
The flaws of this story are: would people really spend when subsidies are used or taken away? Especially in rural areas, average household income is still very low. Second, one has to recognise that for more consumer sector companies, e.g. retailing, apparel, shoes, food & beverage, etc, the competitive landscape is not favourable because the entry-barrier for these industries are generally not very high. Top listed company with low-single-digit market share is not uncommon, and listed companies have to compete not only with other listed companies, but also some very small companies. Consumer sector as a whole may be good, but picking a few stocks within? Well, I wish you good luck.
There is another problem: despite the need for rebalancing its economy towards a domestic consumption driven economy, and despite government’s push towards that direction, it is not happening (to be fair, it’s probably happening, but at an extremely slow pace).
So this is the funny bit: the consumer story was so hyped in the past year or two for whatever reasons that I could not understood or misunderstood, but Chinese people as a whole are not spending a whole lot more as of yet.
Of course, the richest bit of people are spending a lot. They buy Prada, Gucci and LV everywhere (and for that matter, buy properties everywhere). But these are not the majority of Chinese people.
So I admit that I simply did not understand the validity of such a story, and decided that I would just forget about the story. After I totally ignored the story, as part of the story goes bust, I have little ideas how it happened.
Sport-wear sector, which has been doing very well back in 2009 and early 2010, is now being hard hit, lead by Li Ning (2331.HK). In fact, it has been doing quite badly since the second half of last year. While there are some like Xtep (1368.HK) and Anta (2020.HK) which are holding relatively well despite recent sell-offs, a few others are much less lucky. In fact, Li Ning are Dongxiang (3818.HK) have all been making new lows, and they are now not very far above from their lows in early 2009 after Lehman Brothers collapsed.
Now back to the question I asked in the title, something that I have been questioning for a really long time: how could investors really reconcile the reality that domestic consumption fails to pick up for the Chinese economy as a whole and the hyped consumer stocks story?