Seven plays on Chinese consumption
By
Alan Gibbs Dec 11, 2009
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Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Alan Gibbs, manager, Waverton Asia Pacific Fund, J O Hambro Investment Management.
There are two opposed views on China. First, that its embrace of capitalism provides us with an unrivalled long-term investment opportunity. Second, that the most populous nation on earth is misallocating resources and creating above its capacity, which will eventually cause economic mayhem. For 30 years I have been on the side of the bulls – and I still am.
China's transformation began in 1979. Over the past 30 years some 300 million people have moved from a rural environment to an urban one. Around 35% of Chinese people now live in cities; there are 148 conurbations in China with a population of a million or more. Another 200 million will move to cities over the next 20 years, taking the urban population in China to more than 50% of the total and nearer to the global average. People in cities get richer more quickly than their rural cousins, a process that drives growth and consumption. None of this can happen without steel, the building block of growth. I like Angang Steel (HK: 347), the leading company in China.
Meanwhile, those who bemoan China's "lack of consumption" have it all wrong. Vehicle sales this year will, for the first time, surpass US sales of more than 13 million. But in China only one person in 50 owns a car; in the US there are 1.1 cars per person. So I also like Denway Motors (HK: 203) – a market leader, joint ventured with Honda. A similar case can be made for houses, watches, computers, pints of lager, indeed anything Mr Average in the West already has, but Mr Average in China does not. So I expect Tsingtao (HK: 168), one of the oldest brewers in China (with a national brand), to expand rapidly with the economy.
Mainland China has been able to grow at breakneck speed (just as Hong Kong and the other Asian Tigers did before it) on the back of strong central government, low tax rates and minimal state spending. How? The secret is letting banks lend and people and companies acquire title deeds to property. This just wasn't possible even 15 years ago. Beijing has learnt 'on the job' or, as Deng Xiaoping put it, "crossed the river by stepping on the stones". In the countryside – where 800 million still live – this process has only just begun. Now for the first time you can borrow against land holdings, and land is beginning to change hands. This heralds the start of another big step forward. So my next tip is China Overseas Land (HK: 688), the largest real-estate developer in China. It has great government connections – vital for acquiring a land bank.
GaveKal, an Asian analyst, says: "Chinese savers will have a much greater array of choices – they will not simply have to shelve their money in low interest-rate accounts at state-owned banks. With the birth of consumer finance companies, the establishment of mortgage companies to help China's farmers remortgage their land, or the emergence of non-bank finance, capital will become more efficient." ICBC (HK: 1398), the largest bank in China, is set to benefit. Finally, a couple of smaller firms. West China Cement (LSE: WCC) and Yong Mao (SP: YMAO), one the largest crane-makers in the world. If the shares fall, buy some more – volatility is part and parcel of Asia. Then wait ten years – you'll be a lot richer.
The stocks Alan Gibbs likes
| 12-month high | 12-month low | Now |
|---|
| Angang Steel |
HK$19.64 |
HK$6.05 |
HK$16.64 |
| Denway Motors |
HK$5.54 |
HK$2.00 |
HK$5.37 |
| Tsingtao |
HK$44.00 |
HK$13.28 |
HK$40.20 |
| China Overseas Land |
HK$19.70 |
HK$9.22 |
HK$18.44 |
| ICBC |
HK$7.07 |
HK$2.99 |
HK$6.64 |
| West China Cement |
508p |
48p |
466p |
| Yong Mao |
SG$0.34 |
SG$0.10 |
SG$0.30 |
|
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