With an ageing population and shrinking workforce, China has the enormous demographic task of rebalancing its population.
The ‘single-child policy’, which has been in place since 1979, has created an imbalance of males to females due to the cultural preference for boys. Correcting this imbalance could take generations, but it is never too late.
We believe that with the new government in place, we will see a relaxation of this rule and this could possibly extend to a new ‘two-child policy’.
Consumer stocks in China often trade at very expensive price-to-earnings multiples due to China’s relentless wage growth and enormous population.
However, smaller companies are often not on the radar of many brokers and, therefore, opportunities can always be found.
One such company is Prince Frog International, which has established itself as a leading childcare brand in China for moisturisers, shampoos and toothpaste. More importantly, it has products that I would buy for my own kids.
In the past year, the company’s management has proved itself by achieving the goals set at our meetings. This included the disposal of non-core assets, enabling them to focus their efforts and continue to gain market share.
Furthermore, new products have been launched consistently, which helps maintain its excellent margins. Prince Frog was trading on a low-single-digit multiple when I came across it, and I believe they now deserve a mid-teen multiple – which is actually similar to their peer group. Better still, they are in a net cash position.
A further support to this theory is its marketing campaign. Prince Frog’s ‘Frog Prince’ cartoon has become so popular that it is now televised across the whole of China.
It is now in its third season of the animated series and historically this has led to strong sales. To tap into all sales avenues, they have also recently entered into the fast growth of e-commerce.
Finally, Prince Frog is making progress in raising its exposure to China’s top tier cities, which historically have had a preference for international brands. In order to achieve this they now have shelf space in supermarkets like WalMart, Tesco and Carrefour. This is essential as, with the recent healthcare scandals surrounding baby milk, consumers have a preference to shop where quality control is high.
The new Chinese government has many battles ahead of them: international pressure to appreciate their currency, pollution and demographics to name but a few. With a shrinking workforce, China will soon lose its infamous ‘made in China’ brand if it acts later rather than sooner. A ‘two-child policy’ is, perhaps, just the beginning.
Fen Sung is manager of the Premier China Enterprise fund
