Foreign money pours in for manufacturers, a sign of confidence in consumer sector
By Joanne Chiu
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 13, 2020).
Foreign investors are wagering on the hardiness of the Chinese consumer, piling into China's leading makers of refrigerators, rice cookers and air conditioners.
The interest in firms such as Haier Smart Home Co., which owns General Electric Co.'s former appliances arm, is a bet that slower economic growth won't hurt household spending, and that a steep decline in Chinese car sales says little about demand for other durable goods.
It is also effectively a vote of confidence in Chinese authorities, who are trying to move toward an economy driven by domestic consumption rather than exports.
The investments have helped push the market capitalizations of both of Haier's bigger rivals, Midea Group and Gree Electric Appliances Inc., to roughly $60 billion -- or about six times the value of U.S. counterpart Whirlpool Corp.
Gree, which makes air-conditioning units and rice cookers, last year sucked in about $3 billion in funds from offshore investors, according to financial-data provider Wind. That was the year's biggest inflow into a mainland-listed company through Stock Connect, a trading link between Hong Kong and mainland China. The stock jumped 84% in 2019 and hit a fresh high this month.
Midea drew $1.5 billion in offshore funds via the trading link, and gained 58% in 2019.
The addition of mainland Chinese stocks, known as A-Shares, to indexes compiled by MSCI Inc. and FTSE Russell, has helped lure foreign investors into Shanghai- and Shenzhen-listed companies.
Many buyers have focused on companies serving Chinese consumers, including distillers such as Kweichow Moutai Co. Ltd and sportswear makers like Li Ning Co., since they see these outfits as reasonably insulated from trade friction with the U.S.
Tony Wang, a consumer analyst at Credit Suisse, said consumer companies remained foreign investors' first choice overall in mainland markets. However, he said stretched valuations for drink and footwear companies had prompted some investors to rotate into home appliances, whose shares are comparatively cheaper.
Midea trades at 15.2 times forward earnings, higher than its foreign rival Whirlpool but far below Kweichow Moutai's 28.5 times or Li Ning's 32.4 times, according to FactSet.
Analysts on average expect Midea's earnings to rise 13.6% in 2020, according to data from Refinitiv Datastream.
China's home-appliance market is huge and still growing. The nation is the world's second-largest economy and in 2011 it overtook the U.S. as the world's largest market for consumer appliances by sales volume, according to market-research provider Euromonitor International.
The outlook is aided by a growing middle class with rising disposable income, a resilient housing market and an increasing appetite among poorer rural consumers for large home appliances known as white goods. That has allowed the firms to focus largely on their home market: FactSet says roughly 85% of Gree's sales are generated in mainland China, as are nearly 58% of those at Midea.
The companies have also invested in research so they can offer younger consumers smarter and more ecologically friendly products.
Singapore's DBS Bank estimates Chinese white-goods sales will grow 8.3% annually through 2023. It anticipates 20% growth for smart appliances -- devices that are internet-connected and can be controlled remotely, for example via an app or by voice.
Nicholas Yeo, head of China equities at Aberdeen Standard Investments, said China's appliance industry had consolidated over more than a decade and some firms had gone on overseas acquisition sprees.
That means a more concentrated market and more pricing power, Mr. Yeo said, meaning firms are better able to hold prices steady or increase them without deterring customers. "It is the harvesting period," he said.
Mr. Yeo manages the firm's A-Share fund, which owns stakes in Midea and Haier. He said many Chinese shoppers also gravitate toward local brands because those businesses were "more able to adapt to local tastes and the local ways of living." He said property developers were also selling more fully fitted homes, generating another source of demand.
Robert Horrocks, chief investment officer at San Francisco-based Matthews Asia, said China's top appliance producers enjoy economies of scale, so "they can generate very healthy profitability and return on capital that their competitors can't match." It is also hard for foreign rivals to match their nationwide distribution networks, he said.
Mr. Horrocks manages the firm's Asian Growth and Income fund. He declined to comment on its holdings. FactSet data shows it owns a stake in Midea.
The popularity of these investments is a potential problem for international institutions. Foreign investors hold 27.7% of Midea through Stock Connect and two other investment programs, not far below China's 30% limit on international ownership for any single stock.
Last year, MSCI cut Midea's weighting in its indexes because of concerns about "potential investability," and removed another stock entirely.
Write to Joanne Chiu at email@example.com
(END) Dow Jones Newswires
January 13, 2020 02:47 ET (07:47 GMT)Copyright (c) 2020 Dow Jones & Company, Inc.