China’s consumption upgradeAffl uence levels in China have risen at an impressive rate over the years. A domestic worker earning a monthly wage of 8 hundred yuan just a decade ago now makes between 6-8 thousand yuan monthly. Though the absolute value may not be considered large relative to wages in some other markets, the upgrades are signifi cant. But perhaps more impressively is how the trend shows no sign of slowing despite a gloomy global backdrop.

According to a 2016 study conducted by human resource consulting fi rm, ECA International, Chinese salaried workers can expect to see wages continue on an upward trajectory in 2017. The study predicted an average salary increase of 6.5% in 2017 for Chinese workers. Though the fi gure represents a more subdued rate of growth from previous years, it far outpaces the 1.5% global average growth reported in the same study.

Greater focus on lifestyleMillennials/young-generation Chinese, or those broadly defi ned to be between 18 to 35 years old as of 2016, are poised to overtake those born in the 50s, 60s, and 70s as the dominant force in the Chinese consumer market. This particular demographic of Chinese consumers bypassed the periods of economic hardships experienced by their predecessors who, as a result, have tended to be more frugal. In general, the millennials’ growing purchasing powers, looser hold on their purse strings, and greater appreciation for work/life balance are driving appetite for lifestyle and well-being products and services.

The development is refl ected in a 2015 joint research between Alibaba and the Boston Consulting Group which found that young generation Chinese tended to be more sophisticated consumers than those older than 35. They are eight times more likely to be college graduates, travel overseas twice as much and have more brand affi nity than older Chinese and even U.S. consumers of the same age. In fact, consumption by young-generation Chinese consumers was growing at twice the pace of consumers older than 35. The share of total consumption by the young generation is projected to increase from 45% to 53% by 2020, the study showed.

Domestic travel on the riseChina’s domestic travel sector is one which has benefitted from this development. Domestic travel, both for business and leisure, is at a high, according to the China National Tourism Administration. Data from the government agency charged with developing the country’s tourism sector showed that domestic travellers took 4.44 billion trips in 2016, a YoY increase of 11%. The corresponding revenues from these trips totalled 3.9 trillion yuan.

Domestic business travellers contributed greatly to this amount, according to the Global Business Travel Association. The group found that total business travel spending was expected to increase 8.4 percent from 2016, bringing total Chinese business travel spend to US$344.6 billion.

But leisure travellers are the ones set to really drive domestic travel spending numbers as more local businesses adopt the annual leave system. This, combined with an ever expanding high speed train network is enabling more and more to partake in short distance leisure holidays.

Domestic travel expenditure growth (2007-2015)

(in R

MB

bill

ions

)

0

500

1000

1500

2000

2500

3000

3500

4000

10 11 12 13 14 15090807

777 8751,018

1,258

1,9312,271

2,628

3,031

3,420

2007 –

2015

CAGR

: 20%

Source: China National Tourism Administration, US Travel Association, Morgan Stanley Research, December 2016

w

CH

INA

INV

ESTM

ENT

THEM

ES 2

017

China’s consumption story remains steadfast. Charlie Awdry and May Ling Wee, China equity portfolio managers, explain why they think investors with a selective approach can capitalise on this trend.

Ann

ual p

erce

nt c

hang

e

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

10 11 12 13 14 15f 16f 17f

10.4%

16.7%

12.9%

14.7%

16.6%

11.4%

9.2%8.4%

Total uusiness travel spending - China

Source: Global Business Travel Association November 2016

Part I: Travel and leisure

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A boon for budget hotelsHotel chain operator, China Lodging (华住酒店集团), is a beneficiary of these trends. The company is China’s largest economy hotel chain, managing, operating and franchising close to 3000 hotels across 12 brands in the economy segment, the midscale segment, the upper-midscale segment and the upscale segment. China Lodging not only counts the likes of Alibaba and Huawei as their corporate customers, but also an increasing base of mass urban customers with a growing affinity for leisure travel. China Lodging now drives half its revenue from business travellers and the other half from the leisure-seekers in China.

In January 2016, China Lodging completed a share and asset swap agreement with international hotel operator, AccorHotels. The deal effectively gave the mainland company greater access to middle and upscale hotel markets which, according to latest trends, is outperforming the budget segment as Chinese consumers demand more. At the same time, China Lodging is continuing with its room upgrade programme for its Hanting (汉庭), budget economy hotel brand.

Today, China Lodging is concentrating on developing new hotels in first and second tier cities where demand is holding up much better than the commodity/heavy industry based lower tier cities. In addition, the company is bolstering its brand portfolio with additions and upgrades.

As of October last year, the company was boasting a 5-year sales compound annual growth rate (CAGR) of 28% and earnings before interest, tax, depreciation and amortization margin (EBITDA) of 22%.

Growing ’athleisure’ segmentBuoyed by the same factors, mass market ‘athleisure’ or athletic wear worn for leisure, has emerged as an attractive sector as a growing segment of Chinese consumers joins this global trend. As a result, athletic wear sales in China are expected to grow steadily in coming years, with government-led initiatives and Chinese consumers’ desire for a healthier lifestyle leading the way.

At its current rate, the total market size for the sector is expected to reach RMB 3 trillion by 2020, a figure translating to approximately 12.5% CAGR, according to data from Credit Suisse.

Market size of China’s sportswear industry

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

201520142013201220112010

RMB (million) YoY growth

130,567

n/a

RMB(million)

YoY growth(RHS)

141,776

8.6%

139,229

-1.8%

134,683

-3.3%

148,335

10.1%

165,035

11.3%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Source: UBS, Euromonitor, September 2016

Anta Sports is one company which is expected to benefit from this trend. It has led its domestic peers in brand and product differentiation and just like its global counterparts; Anta is convincing Chinese consumers in lower tier cities of the need for different equipment for different sporting activities. The company is seeing success in this front partly due to the consumption upgrade.

With its network of 7000 retail points throughout China, Anta Sports, looks strongly positioned to capitalise on millennials’ growing appetite for health and lifestyle related products and services. The sportswear giant recorded 18% cash flow return on investment (CFROI) as of October 2016, Credit Suisse data showed.

SummaryChinese consumer tastes and demands are evolving in step with rapidly rising affluence levels. Travel and leisure are but examples of sectors expected to see benefits from this development. We believe that our strategic focus on well managed, cash generative companies focused largely on the consumer is well suited for prospering in China’s new economy. Investors are starting to realise that many Chinese companies are delivering profit growth and share price returns despite macroeconomic issues, and they can continue to do so.

China: Travel and leisure

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February 2017 Henderson Global Investors (Hong Kong) Limited H027168/0117

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