China: Looking beyond the old favourites

When it comes to pragmatic value, China offers a myriad of investment opportunities – attractively priced businesses with strong long-term growth profiles, supported by structural tailwinds.

In the latest episode of the Good Value podcast, Alison Savas and Sunny Bangia discuss the equities in Antipodes’ portfolio providing investors exposure to the rise of the Chinese consumer. They also discuss decarbonisation in China and a portfolio holding providing robust exposure to this other major multi-decade investment opportunity. 

Listen here or continue reading below.

Looking beyond the old favourites

For quite some time investors looking to get exposure to the rise and rise of China looked to popular western-owned global brands such as Nike or Starbucks. But the dynamics are rapidly shifting and are continuing to evolve.

A breed of domestic brands are on the rise and are likely to take market share. These are businesses that investors can’t ignore.

As China has emerged as one of the largest economies in the world there’s been a real shift in the composition of the economy.

Exports as a percentage of GDP peaked in China in 2007, at around 35%, and today it’s less than 20%. What this tell us is China has been pivoting towards a consumption and services driven economy for more than a decade now.

This, we think, will continue – underpinned by some powerful shifts in demographics. It’s no secret the population is getting wealthier, but by the end of this decade China will have a demographic profile more akin to that of a developed world economy where 20% of the population accounts for 40% of aggregate income.  Tech and trade wars have further prompted China to focus on developing its domestic economy. We’re seeing rising nationalism in China, and with that we think domestic brands can take market share from global brands. Looking ahead we could see China and the US continue to economically decouple.

Despite the negativity we might hear around China politically, or talk of shorter-term economic tightening, this is an undeniable long-term story of growth.

Here’s three attractively valued stocks in our portfolios providing robust exposure to Chinese domestic consumption.

Trip.com Group

Trip.com is an online travel agency – much like Expedia. It has almost half of the online domestic travel market in China and dominates online international travel, with around 70% share.

We see international travel as a major growth opportunity in China. China’s GDP per capita is 30% higher than Thailand. Yet the Thais are already travelling more than the Chinese.

In normal conditions half of the international travel from China is still to Macau, Hong Kong and Taiwan. This can come back quickly with the opening of travel bubbles, so Trip.com is a reopening play. And as the rise of the Chinese consumer continues, the purse-strings will open for more international travel.

It’s also worth considering that only around 15% of international flights are currently booked online in China, with most trips still booked through traditional tour groups. We expect the popularity of booking online to gather pace, much like in western countries, and Trip.com is at the forefront.

Our analysis has the company’s earnings likely to exceed pre-COVID levels in 2023, where we see the business valued at just 12x operating profit.

Meituan

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.

In this context Alibaba dominated the conversation. But investors can never set-and-forget. The retail landscape continues to evolve and we see new winners emerging.

We’re closely watching the emergence of what’s called ‘community group buying’ in China – it’s essentially the modernisation of fresh food and pantry staples. Instead of making multiple trips to the wet market each week,customers can place their grocery order online and need only go to their nearby pick up point to collect their goods.

Currently, the platforms are still sourcing fresh produce from a local wholesaler (the ultimate goal is to source directly from farmers) but it’s already cut out several layers of distribution, so prices have already started falling.

Meituan is China’s largest food delivery business (the Uber Eats of China) and has used its dominance in food delivery to quickly take the lead in community group buying and we think they’ll be hard to dislodge. The company has around 25% market share, but this is still less than 1% of total grocery.

Grocery is estimated to be a $2 trillion market – a large opportunity to fight for. Profits in Meituan’s traditional businesses today are being reinvested into community group buying. But if we roll forward two years, ifcommunity group buying can take around 5% of the grocery market and Meituan can take around a third of this, Meituan’s operating profit could pivot from a loss today, to $7 – 8 billion as the company reaps the benefits of its investment and scale.

Ultimately, we think community group buying can take 10% of China’s grocery market over the next 5 years. We could see Meituan’s revenue base almost double from $20 billion in 2020.

It’s a dominant business with a very interesting secular growth opportunity.

Tencent

Today, Tencent dominates China’s online advertising market given WeChat is China’s largest social and messaging platform. But the competitive landscape is changing here too. New social platforms are emerging and the competition for eyeballs is increasing.

Will Tencent become the next Alibaba?

Unlike e-commerce, the penetration of digital advertising in China is low and lags that of the US as a percentage of GDP. Online advertising will continue to grow with economic growth and it will take share from more traditional forms of advertising. More competition can be mitigated by the fact that the segment itself has so much room to grow.

Even with a backdrop of more competition, WeChat is hugely under-monetised relative to time spent. Tencent not only has a powerful social platform but it’s also one of the leading e-wallets. Tencent’s ability to collect data and build a user profile is perhaps one of the best in the world, and the company will be able to monetise this as the digital advertising economy grows.

Tencent is a dominant platform embedded into daily life in China. The core business is growing earnings at 20% p.a. and valued at around 19x earnings.

Follow Antipodes on Linkedin

Follow Antipodes on Twitter

Subscribe to receive the latest news and insights from the Antipodes team

Subscribe to updates


This communication was prepared by Antipodes Partners Limited (ABN 29 602 042 035, AFSL 481 580) (Antipodes). Antipodes believes the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distribution and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so in light of their specific investment objectives and financial situations. Any person considering action on the basis of this communication must seek individual advice relevant to their particular circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws, Antipodes disclaim all liability to any person relying on the information contained on this website in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information.
Any opinions or forecasts reflect the judgment and assumptions of Antipodes on the basis of information at the date of publication and may later change without notice. Any projections are estimates only and may not be realised in the future. Information on this website is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained on the website is prohibited without obtaining prior written permission from Antipodes.
Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238371 is the product issuer of funds managed by Antipodes.  Any potential investor should consider the relevant Product Disclosure Statement available at www.antipodesonespartners.com when deciding whether to acquire, or continue to hold units in a fund. The issuer is not licensed to provide financial product advice.  Please consult your financial adviser before making a decision. Past performance is not a reliable indicator of future performance.
23 June 2021
Alison Savas, Client Portfolio Manager