Is China’s consumption downturn a bad thing for investors? Not necessarily. One analyst’s work found a hidden gem for Portfolio Manager Tina Tian, in a sector that many investors have turned fearful about.
Key takeaways
- Many investors have shunned China’s consumer sector, meaning there are hidden gems to be found.
- When one analyst spotted a snack store chain poised to do well outside the big cities, it was time for a field trip.
- An impressive retail experience helped build conviction and led to a strong performer in my portfolio.
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It’s not an easy time to invest in China’s consumer sector. Consumption in the country has been gloomy over the past few years. A property slump that began some five years ago still weighs on confidence. Households are cautious on spending.
But the disappointing macro numbers doesn’t mean the sector is uninvestable. A K-shape pattern is emerging among consumers who appear happy to open their wallets for either value-for-money goods or premium products. I was confident that there would be resilient companies bucking the broader consumption gloom and adapting to the new pattern. History told me that this was usually the case. Two discount store giants, Germany’s Aldi and Japan’s Don Quijote, both expanded quickly when the two countries grappled with an economic slowdown. After sifting through numerous Chinese companies, analyst Alex Dong found a good candidate for my portfolio, and it came in the form of a snack store chain.
By cutting out intermediaries and sourcing directly from manufacturers, the company is able to offer snacks such as candied fruits, melon seeds, and roasted nuts at discount. It also sells some products by weight or in small bags so that cost-conscious customers can buy more kinds of snacks in one purchase. As a result, the company looked ready to thrive in smaller towns or counties where there’s a low penetration of convenience store giants like Lawson and 7-Eleven and where young customers are moving away from traditional mom-and-pop shops.
Retail therapy
A thorough understanding of the company demanded first-hand information. Alex and I did extensive on-the-ground research, visiting the franchised stores in 10 towns across China. It was obvious that most customers were young, aged 15 to 40 years old, who prioritise ‘happy consumption’ - spending on affordable items that provide immediate emotional gratification. The customers filled their shopping baskets with a diverse selection of snacks, from instant noodles to konjac chips. The stores were crowded, sometimes with long lines at checkouts. The clerks greeted customers, assisted with item locations, and processed transactions efficiently. We also talked to the franchisees who were optimistic that the business model would prosper for more than a decade while the payback period should be only two to three years. And of course, we bought some of the products to taste the quality ourselves.
In addition to multiple meetings with the company’s management team, we talked to competitors and visited their shops to gain a more rounded view of the sector.
The field trips reinforced our confidence in the potential earnings growth of the company and its new store openings.
All the efforts paid off. The stock’s performance exceeded my expectation. The success encouraged me to look for more Chinese consumer companies catering to the changing trends.
The increasing competition in China’s grocery retail requires detailed attention. Alex and I will be watching closely how this company continues to adapt to evolving consumer patterns.
It may take some time before we see a real rebound in China’s consumption. But there are still plenty of unique retail strategies that can help build and expand market share. The snack store operator isn’t the only hidden gem in this vast market.
