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Urbem's 'Megatrend' Series: The Rise of China


"China is a sleeping giant. When she wakes, she will move the world."

- Napoleon Bonaparte



What the French statesman foresaw two centuries ago can be considered a trendy investment thesis today. China has been playing a central role in shifting the world's economic power. The country is expected to eventually replace the U.S. and become the world's largest economy by 2030, benefiting from several tailwinds such as the expanding middle class, urbanization and consumption upgrade.


The rise of China has been continuously echoed by investors bullish on the region, including Charlie Munger (Trades, Portfolio). Last week at the Daily Journal (NASDAQ:DJCO) annual meeting, the legendary guru contended that the strongest companies are in China, not in the U.S.

However, for those who are concerned with the quality of corporate governance, regulations and the legal system in terms of direct investments in Chinese businesses, we have developed a workaround of investing in non-China stocks with a better risk/reward balance in order to profit from this megatrend.

Take the luxury sector as an example. Per a previous study by Bain Consulting, Chinese consumers accounted for approximately one in three of the world's personal luxury purchases in 2017. We can reasonably expect such a ratio to rise gradually in light of the vast gap between the average luxury spending per capita between China and the U.S. or Japan.

This macro tailwind will inevitably benefit the leading luxury brands in China. In the present Chinese market, these top brands are all owned by foreign companies, to which China is one of the most important share markets and growth engines. For instance, in fiscal 2019, France-based LVMH (XPAR:MC), the owner of Louis Vuitton, Fendi and Givenchy, earned more than 30% of its revenue in Asia (excluding Japan) with a year-over-year increase of 18% in regional revenue. Meanwhile, Switzerland-based Richemont (XSWX:CFR), which owns Cartier and Van Cleef & Arpels, generated nearly 25% of revenue from the Greater China region, growing at 19% year-over-year.

Another aspect that we like about luxury plays in China is that market leaders do not mainly compete with locals. This reduced the competition quite a lot in our view. Think about those Chinese Internet companies employing loss-leading strategies in order to "win." We notice a similarly favorable competitive landscape in the sporting goods and cosmetics industries. While fighting for the top market position in the space, Nike (NYSE:NKE) (16% revenue share from Greater China) and Adidas (XTER:ADS) (18% revenue share from Greater China) have both been widening the market share gap against Anta Sports Products (HKSE:02020) or Li Ning (HKSE:02331) over the decade.

We also like to see that global beauty giants are taking advantage of the booming online marketplace in China. For example, L'Oreal (XPAR:OR) (28% revenue share from Asia Pacific) partners with Alibaba (BABA) and Tencent (HKSE:00700) to enhance its digital presence. Half of its sales in China now come from e-commerce, compared with only 2% in 2012 and 13% for the whole company globally.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Nike.

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This article first appeared on GuruFocus.