GUEST ARTICLE: Time To Review China's A-Shares Market As Access Gets Easier Stephanie Li, 22 December 2017
Accessing the mainland, A-shares market in China is being made easier, so what are the most tempting places to go? This investment house sets out its ideas.
Stephanie Li, investment analyst at Aubrey Capital Management in Edinburgh highlights some of the new drivers for growth in the Chinese market. The views of the author aren’t necessarily shared by the editors of this publication, but we are pleased to share these views and invite readers to respond. They can email firstname.lastname@example.org
Foreign investors eager to access high-growth Chinese stocks are applauding new regulatory measures which will smooth their engagement in the challenging A-share market.
Firstly, Hong Kong Exchanges and Clearing Limited (HKEX) have now approved Realtime Delivery versus Payment, or Real-time DVP, money settlement in Renminbi, Hong Kong dollars and US dollars for Stock Connect and its mutual market access programmes with the Shanghai and Shenzhen stock exchanges. This development should limit settlement risk and make it easier to trade A-shares.
Secondly, from June 2018 the MSCI emerging markets index is to include 222 large Ashares. These will comprise just under 1 per cent of the index to start with, but the proportion is likely to grow over time, as it did in the China H-shares market.
Foreign investors have typically shied away from investing in China via the A-shares market. Their concerns have included the lack of recognised and consistent structures in which to invest, sometimes questionable corporate governance practices, language barriers, and “punchy” valuations. State-owned enterprises of dubious quality have suggested there are better opportunities elsewhere.
Foreign ownership of A-shares is still under 2 per cent. The market cap of stocks listed on the Shanghai and Shenzhen exchanges combined already amounts to $8.4 trillion, versus $3.9 trillion for the HKEX. The average price earnings ratio on the Shenzhen stock exchange is 36x and Shanghai stock exchange is at 18x, whereas the HK stock exchange is only at 15x.
However, the evolving financial architecture around the A-share market is prompting a review of opportunities there. We believe very strongly that there are some great examples of investable stocks, including the five listed below. All five examples are consumer stocks exclusively available on the A-shares market, and play particularly well to the continued urbanisation that is happening in China, and the desire of the growing Chinese middle class to buy premium quality goods and services.
Aubrey believes that as people go through the wealth cycle, their consumption behaviour starts to change. These “consumer discretionary” stocks also fit with what foreigners have been net buying through Stock Connect. Robam is a premium kitchen appliance brand with goods priced 40 per cent or more higher than the industry average. Some 60 per cent of its range and cooking hood sales are sold in the high-end segment. This compares favourably to the industry average of around 20 per cent. The competitive landscape for Robam remains stable. Together with Fotile (a private company) Robam forms a duopoly in the high-end kitchen appliance segment which indicates strong pricing power.
Suofeiya Home Collection is the largest custom kitchen cabinet and wardrobe manufacturer in China but with only a 9 per cent market share, indicating how fragmented the market is and the potential for this firm’s growth. It has delivered a 47.5 per cent compound annual growth rate in sales over the last five years compared with 10% for overall furniture sales for the same period.
Kweichow Moutai was listed in 2001. The company has the strongest brand equity in Chinese white liquor and is positioned at the premium end of the market. It is the most expensive liquor of its kind, with a consistent gross margin of around 90 per cent versus the industry’s average of 40 per cent to 60 per cent. With a $118 billion market capitalisation, the firm overtook Diageo, ($89 billion market cap) earlier this year to become the world’s most valuable distiller.
Inner Mongolia Yili Industrial Group is the largest dairy producer in China with 30% market share in liquid milk and one of the main beneficiaries from the dairy industry’s ongoing recovery. Competition is easing thanks to an undersupply of raw milk.
Meanwhile, China's dairy demand is forecast to grow 37 per cent to $76 billion in five years－overtaking the United States to become the world's biggest dairy market. Yili will continue to gain market share and to consolidate through new premium product launches and increasing global collaborations. China International Travel Services (CITS) is the only nationwide duty-free operator in China. It has more than 200 duty free stores as well as travel agencies covering over 100 cities. The company benefits from booming travel demand from China’s growing middle class. The number of domestic trips in China is estimated to increase to about 2.4 billion by 2020, a rise of 50 per cent compared to 10 years ago. With CITS’ near monopoly in a rapidly growing duty-free sector, and its work to secure more outlets, including Shanghai airport, growth potential remains strong.