Chinese Domestic Consumption Is the Way Forward

by: China OTC Player

Last week, in a speech devoted to economic reform, the Chinese Minister for Industry and Information Technology Li Yizhong highlighted the importance of domestic consumption in moving China away from its export-dominated market orientation. This development follows speeches (in early February) by President Hu Jintao, Premier Wen Jiabao, and Vice Premier Li Keqiang, all focusing on the need for the transformation of the Chinese economy. Of course, increasing domestic consumption is not the only topic discussed. Also mentioned are sustainability, upgrading of technology and development of human resources.

It is, however, very clear that encouraging domestic consumption is going to be an important cornerstone of any major economic policy going forward. Already, in the past couple of years, there have been several measures put into effect for precisely this purpose:

  • In January 2009, the State Council halved purchase tax on all cars under 1.6 liters to 5%. The policy was retained for 2010, with purchase tax raised to 7.5%.
  • In February 2009, the government expanded the subsidy program for rural purchase of home appliances throughout the country after the program was launched in three provinces in 2007.
  • In March 2009, Chinese authorities detailed a plan to give a subsidy to rural residents equivalent to 10% of the purchase price of a new minivan or light truck. This policy was extended for one more year in 2010. The subsidy plan also provided farmers who purchase motorcycles a 13% rebate, a subsidy that is effective till January 2013.
  • In June 2009, the government started a home appliance replacement plan which allocated 2 billion yuan to encourage home appliance upgrades in nine pilot cities, including Beijing, Tianjin, Shanghai and Changsha. Buyers would receive a 10% rebate for new appliances including TVs, refrigerators, washing machines, air conditioners and computers.
  • Finally, starting in January 2010, susidies were offered to farmers to increase output of grain, potato, highland barley and peanut, as well as to purchase agricultural machinery and construction materials.

More measures can be expected in 2010. Looking at our crop of rising Chinese companies, one clear beneficiary would be China 3C Group (OTC:CHCG-OLD), which distributes and retails home appliances in and around the Shanghai region. Similarly, Home System Group (OTC:HSYT) should also be well-positioned to take advantage of thes changes, as it produces a variety of household appliances, including stainless steel gas grills and ovens, ceiling and table fans, decorative lamps, LEDs and energy-saving lamps.

Then, there are a whole range of companies in the consumer space that could potentially see macro forces working in their favor in the near future. Outside of the food and pharmaceuticals sectors, where consumption is based more on need than driven by nouveau riche desires, the following three companies are worth a closer look:

1) Soko Fitness & Spa Group (OTC:SOKF). SOKF is a fast-growing operator of fitness centers and beauty spas in Northeastern China and suburban Beijing. It recently opened a new yoga facility in the northern city of Harbin and registered 500 members even before the club opened. This is a company that appears to excel in consumer marketing and customer retention.

2) New Energy Systems Group (OTC:NEWN). NEWN manufactures lithium ion batteries for cell phones and other portable devices. The company's products range from low-end cell phone batteries, to state-of-the art, high capacity batteries. NEWN is currently projecting that its net income will increase by over 150% in 2010, giving us a projected EPS of $1.23, as a result of two recent acquisitions.

3) China New Media (OTCPK:CMDI). Nothing smacks more loudly of consumerism than outdoor advertising targeted at the average Chinese shopper. CMDI owns and operates the Dalian's largest outdoor media network, which encompasses bus shelters furnished with billboards, taxi-stop displays, and large-size LED displays at major traffic intersections. The company also furnishes buses and metro-trains with advertising posters.

The Chinese consumer sector is a sector that I'm currently overweight in. And, based on the anecdotes that I've been hearing from instances of consumption during this past Chinese New Year, I'm certainly looking to add throughout the year.

Disclosure: Long CHCG.OB and SOKF.OB.