Local Preferences, Nationalism Boost Chinese Consumer Firms

• Doug Tsuruoka
• On 6:48 pm EDT, Wednesday September 2, 2009

Can a nation's underlying cultural tastes and preferences help drive companies and their stocks?

That's partly the case in China -- especially when officials encourage people to buy traditional-style "Chinese" products as expressions of patriotism or via tax and other policies that favor local firms.

Sales of Chinese herbal remedies are vaulting as middle-class Chinese get more health-conscious. Bridal jewelry sales are soaring because 2009, the "Year of the Ox," is deemed an auspicious year to wed. Families are devoting heavy resources to their children's education -- while the kids themselves play online games.

Many analysts say that when Chinese get rich, as they're doing now, they tend to spend money in uniquely Chinese ways.

"Culture is still a major driving force in deciding what Chinese consumers buy," said David Pietz, a China expert and director of the Asia program at Washington State University. "This will continue to influence the consumption of traditional products in China."

Chinese Tastes SLIM-ing

A number of Chinese consumer firms have recently vaulted to the IBD 100 or have high CAN SLIM ratings. They include jewelry seller Fuqi International (NasdaqGM:FUQI - News) and herbal medicine maker Tiens Biotech Group USATBV, online gaming firm NetEase.com (NasdaqGS:NTES - News) and e-learning firm Chinacast Education (NasdaqGM:CAST - News).

Their products and services cater to what some say is a culturally and government-fueled Chinese consumer liking for gold jewelry, herbal medicines, games and education services. Their appeal hints that these players may enjoy the inside track in the future.

While Chinese companies and their stocks follow the same consumer-led market cycles in other nations, the choices that Chinese shoppers make can be tweaked by a culture that's 5,000 years old.

The government is exhorting citizens these days to be more "Chinese" to offset foreign influences, says Robert Lawrence Kuhn, an investment banker and senior Citigroup adviser on China. Officials, for example, are reviving Taoism, a native Chinese belief system, to counter Christianity and Western ideas like democracy.

Ying Yeh, a Beijing-born exec who heads U.S. industrial process provider Nalco's (NYSE:NLC - News) China growth efforts in Shanghai, says the push extends to all facets of Chinese culture. "People are (rediscovering) ancient Chinese books and a host of other things," Yeh said.

Foreign firms often will have to adapt their products and services to Chinese tastes. Back in the '80s, U.S. makers tried to sell large, American-style refrigerators to Japanese before realizing that most homes in that country were too small.

Western firms have come a long way. McDonald's (NYSE:MCD - News) and Yum Brands' (NYSE:YUM - News) KFC have tweaked their menus -- McDonald's serves a "rice burger" in Hong Kong, catering to local tastes.

General Motors designs cars it sells in China with more rear-seat features to appeal to executives who are used to being chauffeured.

Old Culture, New Taxes

But China's government also heavily taxes imports of foreign jewelry, food and other products that might compete with domestic firms. It insists that foreign companies partner with local players, limiting their reach.

This suggests that foreign suppliers will have a tough time vying with Chinese firms and some may be discouraged from even trying.

Take jewelry. China's government expects 10% more couples -- nearly two million people -- to marry this year.

Chinese jewelry sales jumped 20% in the first half of 2009.

While customs also influence marriage rates in other nations, China's one-year surge in bridal jewelry is unique because of that nation's huge population and a pervasive belief in its ancient zodiac.

Fuqi, a maker of high-end gold, platinum, diamond rings and other items, is clearly benefiting.

Meanwhile, China slaps a duty tax of up to 34%, a 17% value-added tax and a consumption tax of 5% on imported jewelry, for a total of 54%.

It's part of a government policy of shielding local industries. Only the biggest and best-known foreign brands can compete against local firms due to such taxes.

These factors partly explain why Fuqi has boasted an 82% profit growth rate in 2007-09. Its shares have nearly quadrupled this year.

A Consumer Revolution

Yeh says spending on jewelry also reflects pent-up Chinese demand for products banned during hardline communist rule. Gold rings, for instance, were outlawed during the Cultural Revolution.

"Chinese really want to pamper themselves," said Yeh, a former U.S. diplomat, who has worked for years in China for U.S. companies like Kodak (NYSE:EK - News). "They want gold necklaces. They want to live longer. They don't believe in chemical-based Western medicines so they go for traditional Chinese medicine. They want to entertain themselves with gaming and educate their children."

While the U.S. and Europe saw consumer buying binges after World War II, the jump from rags to riches in China is unprecedented. Red Guards were still beating people for wearing gold jewelry, and burying school teachers alive as "counter revolutionaries," as late as the 1970s. But in less than 30 years, China has shifted to a market economy and now boasts a middle class of 300 million.

Herb and potion-based medicine is taken seriously by most Chinese. It's been used for thousands of years. Many believe Chinese folk medicine is more effective in treating illnesses than Western drugs.

Tiens Biotech's top sellers are nutritional and wellness products based on traditional Chinese medicine. Its Q2 profit doubled to 8 cents per ADR. But its U.S. shares are still in the cheap seats below 3.

School Is Back, Forever

The Chinese focus, some say obsession, with educating the young partly stems from the value placed on education by Confucius, the famous sage who laid down the core values of Chinese culture 2,500 years ago.

Officials and members of China's growing middle class also feel an urgency about educating the young after the Cultural Revolution denied a university education to an entire generation.

That created a chronic shortage of trained engineers, scientists and business executives in the 1980s as China shifted to a market economy.

Some students attended foreign universities. Others trained on-the-job or studied as well as they could as China built a new national education system from scratch. But as often happens in boom economies, most folks spent more time getting rich than studying.

Now that China's middle class is the world's largest, the current crop of high school and college students is the first to be affluent enough to enjoy all the education services and options of rich nations.

The ranks of new students entering local universities soared from about 2 million in 2000 to 5.4 million in 2007, China's Education Ministry says. The pace is contributing to the biggest postsecondary enrollment of any nation.

So it's not unusual that companies like Chinacast Education are thriving. Chinacast had earnings growth of 20% between 2007 and 2009. Its shares are up 137% since Jan. 1.

A survey last year by e-commerce firm IAC/InterActiveCorp (NasdaqGS:IACI - News) and ad agency JWT found that online gaming is popular because Chinese youths don't have the same social outlets as their peers in other nations. Typical Chinese schools don't have the marching bands, debate clubs and other extracurricular activities that U.S. students have.

This partly explains why NetEase is having a good run. The online gaming firm enjoyed a 20% earnings growth rate 2007-09. Its shares are up 87% so far this year.

Meanwhile, Zhongpin (NasdaqGS:HOGS - News) is benefiting from China's preference for pork over beef.

"A lot of Chinese think pork tastes better. Beef consumption will take a while to get to Western levels," said Nalco's Yeh.

Zhongpin, which is developing a national brand for its pork products, posted a 40% earnings growth rate between 2007 and 2009.

And China recently banned pork imports over swine flu fears.

Buzz up!