Chinese consumption stocks set to gain, says J.P. Morgan

Hong Kong and Shanghai-listed Chinese consumption stocks will edge up in 2011 as Beijing encourages private consumption, reckons J.P. Morgan Asset Management.
Chinese customers shopping for flat screen TVs in Yichang city. (AFP)
Chinese customers shopping for flat screen TVs in Yichang city. (AFP)

Hong Kong- and Shanghai-listed Chinese consumption stocks will gain in 2011 as Beijing shifts its emphasis to quality growth and encourages private consumption in its 12th five-year plan, according to J.P. Morgan Asset Management (JPMAM).

Companies leading the rally will be those with businesses such as household electrical appliances, clothing and footwear. Their stock prices are likely to increase 15% to 20% this year. Publicly traded Chinese healthcare companies will also drive the growth, according to Shunmin Huang, managing director of the firm's Pacific regional group.

JPMAM expects earnings per share (EPS) growth for the CSI 300 and the MSCI China indices to average around 20% and 15%, respectively, in 2011, supported by consumer, healthcare and industrial companies. EPS growth in the two indices is estimated at around 30% for 2010, partly because of the low base in the first half of 2009, the firm said. 

China’s retail sales will remain strong, “although it recorded a lower-than-expected 16% (growth) in February this year; that was mainly due to the falling car sales early this year”, Huang said at a press briefing yesterday.

Zhang Ping, minister of the National Development and Reform Commission, the country’s top planner, said at the China Development Forum 2011 last week, that boosting consumer demand will be the government's priority in implementing its strategy to spur domestic demand during the 12th five-year plan.

Some other Western firms are also optimistic about China's consumption sector. US consulting firm McKinsey has predicted that China can add $1.9 trillion to global consumption by 2025. CLSA, a Hong Kong-based brokerage, believes Greater China consumers currently account for 15% of global luxury goods sales and expects them to account for 44% of global luxury brand sales by 2020.  

However, it is also widely argued that it will take a long time before Beijing can turn the country’s cautious savers into zealous spenders. Household income as a portion of China’s GDP has declined 1% each year during the past 10 years, according to Citic Securities.

Although wages grow at a double-digit rate nationwide, the average savings rate shows no sign of decreasing and people are still penny pinching in most shopping decisions. “With the exception of products with strong brand reputation, such as luxury brands, which are embraced by many consumers in the key cities -- for daily necessities, prices still matter the most to shoppers,” said Carrie Yu, retail and consumer leader for China and Asia-Pacific at PricewaterhouseCoopers.

JPMAM is bullish on Chinese equities overall, both in the A- and H-share markets, and sees good buying opportunities due to the attractive valuations. “Both A-shares and Hong Kong-listed Chinese equities are trading below the long-term average (valuations) after their underperformance in 2010 and at higher return-on-equities (ROEs) than their historical levels.

Among the significant underperformers are policy-constrained sectors, including banks and property, where JPMAM believe many uncertainties have been priced in as the government’s tightening policies have been proactive. “Although continued policy risk remains a challenge, both banks and properties have been market laggards with undemanding valuations,” the firm said.

JPMAM expects China’s inflation to stay above 5% in the first quarter of this year, given the low base effect and food price pressure caused by weather disruptions and Chinese New Year demand. It predicts the consumer price index (CPI) will peak in June this year at a year-on-year growth of around 6%.

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