China still holds promise

With more than 1.4bn customers, growing income levels and a government committed to promoting a consumption-led economy, the opportunity to invest in how and what China consumes remains significant.

The scale and scope of this structural shift is borne out by the fact that consumption now accounts for around 75 per cent of Chinese gross domestic product growth, rising from just 35 per cent in 2010.

More recently, however, we have seen a combination of trade tensions and a cyclical slowdown in the broader Chinese economy impact consumer confidence.

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The auto market experienced its first decline in over two decades, although there have been notable pockets of strength in the consumer space, with areas like domestic sportswear, baijiu (rice wine) and e-commerce remaining strong, albeit still slowing.

So, despite the well-recognised near-term economic challenges facing China, there are still opportunities for discerning investors willing to take a longer-term view.

Within consumption there are trends that are being overlooked or underestimated by investors.

This includes the shift in preference for local rather than global brands within certain products, premiumisation of consumption trends, and also increasing demand for lifestyle services and experiences like education, health care and travel.  

The Chinese consumer has traditionally been viewed an aspirational buyer of Western luxury brands.

But the story today is developing, with an increasing number of Chinese consumers considering local domestic brands. 

Chinese brands now take up 30 of the top 50 brands – a massive increase from 2016 where the number was just 18. The likes of Apple, BMW and Ikea have been replaced by Huawei, Taobao and Meituan-Dianping.

As the Chinese consumer matures it is also becoming more discerning and focused on value, which increasingly favours local brands who understand the local market.

A number of holdings within the portfolio are well-positioned to capitalise on these shifts.


China’s sportswear market, which is expected to see double digit growth over the next few years, is a good example.

Nike, a well-established global player, has a firm hold on the premium end of the market. But on a mass market level local brands, such as Li-Ning, are developing.

Li-Ning, founded by a former Chinese Olympic gymnast, has done a great job in transitioning the brand, appealing to a younger and broader audience with reference to Chinese heritage and characters.

While Nike and Adidas will continue to hold impressive market share in China’s sportwear market, Li-Ning is certainly leading the domestic charge.

On the services side, the portfolio holds New Oriental, which is one of the largest tutoring companies in China, with about 6.3m total student enrolments in 2018.

By May 2018, it had 1,081 learning centres in 75 cities across China. It is set to benefit from a growing middle-class that is also becoming more aspirational and places significant value on education, especially due to a highly competitive job market.

At the industry level, the key driver for private tuition is low university acceptance rates.