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Home-grown Chinese brands offer long-term equity plays

National pride and China’s dual circulation policy bode well for the auto sector, as well as for consumer brands such as sportswear, cosmetics, skincare and infant milk formula, says Credit Suisse.
Crowds walk below neon signs on Nanjing Road. The street is the main shopping district of the city and one of the world's busiest shopping districts.

Growing confidence in domestic brands combined with government policy will increasingly translate into lucrative, long-term investment opportunities in key consumer sectors in China.

“Chinese brands have made remarkable progress in upgrading the quality of their products, with better aesthetics, innovation and technology enhancements contributing to their overall enhanced appeal,” said Edmond Huang, head of China/Hong Kong securities research at Credit Suisse.

The subsequent emergence of national support for these goods – so-called ‘China Pride’ – is manifesting itself notably for products such as sportswear, cosmetics, mobile phones and electric vehicles.

“Confidence in Chinese brands has been slowly growing for a number of years, but it accelerated through the pandemic,” added Lei Chen, China consumer analyst with Credit Suisse’s China Quantitative Insight (CQi).

The ‘Dual Circulation’ approach will also shape this economic direction and development over the coming years, believes Credit Suisse. Huang described this policy as a strategic choice to rebalance the Chinese economy away from an overreliance on external demand, to provide a catalyst for unleashing domestic demand and achieve more sustainable development.

“On the supply side, China will step up technological innovation to move along the global value chain.

On the demand side, it aims to boost household incomes to stimulate domestic demand,” he added.

The contribution to the Chinese economy from net exports is no longer as significant as it was 20 years ago, while an ageing population and growing onshore wealth will continue to play key roles going forward.

Driven by demographics

Further fueling this domestic growth opportunity is the fact that the more brand-conscious younger generation is driving the ‘China Pride’ phenomenon.

Being typically wealthier than their parents were at the same stage in life, this newer group of consumers is also making luxury purchases earlier.

“Younger consumers are spending money earlier and are a key aspect of this ‘China Pride’ idea that will become increasingly more meaningful as they mature into the next generation of older shoppers,” Chen said.

Sector selection

In the auto sector, Credit Suisse says China is expected to reduce reliance on imported luxury cars in favour of domestic auto makers that can also produce high-end domestic vehicles aligned with the top-down focus on clean energy and intelligent technologies.

“For the first quarter of 2021, Chinese local brands’ new energy vehicles (NEV) accounted for 75.5% of total China NEV sales volume, reflecting consumer preference for Chinese branded vehicles,” according to Bin Wang, co-head of APAC autos securities research at Credit Suisse.

At the same time, infrastructure such as charging stations to support electric vehicles is proliferating.

In the consumer space, meanwhile, enhanced digital and marketing capabilities plus responsiveness to changing appetite has seen certain goods flourish – including sportswear, colour cosmetics, skincare and infant milk formula.

Credit Suisse analysts also expect certain sectors hit hardest by Covid-19 to make a resurgence, such as travel, entertainment, cinemas and restaurants.

Part of the Mark Allen Group.