China Strategy
More Jewels in the Crown:
Adding More Stocks to Our
China Franchise Basket
Investment conclusion: Echoing our China
economist’s long-term bullish call on China consumers
today, we reiterate that the franchise stocks are the best
way to profit from China’s consumer theme over the
long term. We also add three more names to the
existing Morgan Stanley analyst-nominated China
consumer basket of 19 leading franchises (see our
report dated Aug. 3, Jewels in the Crown: Our Basket of
China’s Consumer Franchise Winners).
A key value driver: We reiterate that franchise is a
crucial long-term value driver for companies pitching to a
large customer base, and even vital in continental
economies such as the US and China given the
extensive geographical coverage and cultural and
economic divergence across the country.
Franchises bolster margins or turnover: US
experience shows that a successful franchise can
deliver consistently superior margins or asset turnover
versus competitors. As witnessed in the US, we expect
the China stock market to reward successful franchises
generously in the long term, although the short-term
outperformance by these stocks may not be obvious.
China is ready for franchise investment: Chinese
consumption is much bigger than it appears, according
to our economist (see Qing Wang’s report China’s
Under-consumption Over-stated). Also in our
calculation, after adjusting for purchasing power parity
(PPP), China’s annual retail sales equal roughly 80% of
those in the US. China’s market economy has
developed to the stage for franchise investment.
Adding three names to our franchise basket: Tingyi,
the food and beverage market leader, Mengniu, the top
dairy brand, and New Oriental, China’s No.1 private
education network.