By Joseph Hogue CFA
Gifting is an important concept in China, especially within the political sphere. Some of the country’s largest retailers are expecting a boost to sales as the government goes through a once-in-a-decade transition of leadership this month. Pent-up demand and the hope to curry favor with new administration officials is expected to increase sales in the fourth quarter and by 10% next year.
Mall in Shanghai, China
While overall economic growth has slowed in the past year, to just 7.4% last quarter, data on retail sales and industrial production have picked up. Since the country only changes party leaders once every 10 years, it will be vital to the incoming administration to secure public favor by appearing responsive to the economy. Beyond a streamlined approval process for new projects and some increased infrastructure spending, the government has been fairly quiet over the last few months relative to the pace of reserve ratio and interest rate cuts in the beginning of the year. This could be in deference to the incoming government, allowing it to make bigger cuts when the changeover occurs.
While ADR shares of Chinese retailers is limited, there may also be an opportunity in U.S. companies with a strong presence in the country. Consultancy firm KPMG is out with a 36-page report on luxury brands in China that details the sector (pdf) and some of the strongest brands. Coach (COH) has been aggressive in the market and is trading at just 15.5 times trailing earnings, a discount to the five-year average price multiple around 18 times.
While shares of the iShares FTSE China 25 (FXI) have rebounded 23% off the 52-week low of $32.21 last October, they are still well off recent highs and trade for just 8 times trailing earnings of the stocks held in the fund. The fund may be a good play on overall growth but does not hold a significant exposure to the Chinese consumer, only in the 16.8% allocation to telecommunications.
The government has made it an explicit goal to favor consumption in the economy and transition from an export model. The Global X China Consumer (CHIQ) invests at least 80% of its assets in consumer companies that are either domiciled in, or whose revenue is primarily from China. Of the 43 holdings, only four are available as ADR issues, so the fund provides a good opportunity into domestic shares not otherwise available to most retail investors.