HSBC GAM bullish on China’s F&B industry

Asset Class in Focus

China’s middle class continues to expand in number and in income, creating investment opportunities in the food and beverage industry as well as casinos, according to Mandy Chan, head of China and Hong Kong equities at HSBC Global Asset Management.

HSBC GAM bullish on China's F&B industry
Mandy Chan, HSBC Global Asset Management

Chan expects mainland food and beverage companies to surprise the market with better-than-expected earnings this year, a result of an industry consolidation over the past five years.

“Some food and beverage makers will start to benefit from the consolidation in the industry as they have closed down under-performing manufacturing plants,” she said, speaking at a recent media event in Hong Kong.

“Better management of resources, on one hand, has lifted profitability. On the other hand, weaker players were mostly eliminated and only strong and quality companies remain.

“Many Chinese-based food and beverage producers plan to hike prices. In retail sales, price increases have not been seen in seven-to-eight years. And on the wholesale side, leading beer makers have largely reduced the discount given to distributors.”

For example, the five leading beer manufacturers in China have cumulatively scaled up market capitalisation to around 85% from 50%, which Chan believes reduces the likelihood of a price war.

Listed beer makers may also benefit this year as Chinese middle class consumer tastes shift to high-end products. In calendar year 2017, mid- and high-end beer product lines recorded approximately 3% and 16% of sales volume growth, respectively, Chan said, citing data from CICC research. Some of the producers may offset low-end product sales by focusing on high-end beer sales.

Middle class consumers

More generally, F&B earnings improvements are also driven by China’s growing middle class with increasing income.

“The salary level of Chinese has risen around 150% since the global financial crisis, which is massive compared to its neighbours,” Chan said. “There was barely a rise in Taiwan and in South Korea it rose 20% over the same period.”

She expects China’s middle-class population to double to 400 million from 220 million in four years, which would create the world’s largest consumer market.

Fan Cheuk-wan, HSBC Private Bank head of investment strategy in Asia, also sees a major impact from China’s expanding middle-class population. She said the spending power of the middle class in the region will drive the demand for discretionary consumption. The beneficiary sectors include companies that provide entertainment, quality education, healthcare and innovative financial products and services.

Casino bet

Chan is also bullish on Macau’s casino industry. She believes growing wealth among the Chinese has a direct influence on casino operators in Macau.

“Over the past two years, the revenue of VIP tables [for high rollers] has been growing as junkers [who lend money to gamblers] are more comfortable arranging credit for the customer. But the profitability was somewhat impacted by the tax on VIP gambling and commission expenses to junkers,” she added.

She predicts that last year’s increase in total bet volume from mass gambling tables will continue. As higher margins can be derived from mass tables, she estimates that the revenue of casino operators is likely to grow 20%-30%.

 


Performance of HSBC GIF Chinese Equity Fund against its benchmark MSCI China 10/40 and the sector China equity

Source: FE. In US dollar.

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