From HOG to HOGS: The Chinese Consumer Buffet

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Prior to joining Global X Funds, Alex Ashby lived and traveled extensively throughout Asia.  He currently manages a group of six ETFs covering the consumer, energy, financial, industrial, material, and technology sectors of the Chinese economy.  The Global X China Consumer ETF (CHIQ) provides investors with exposure to consumer-focused companies in China and is designed to be a transparent, cost-efficient way to get access to the growing consumer demand within the country. 

[continued from What’s a Wumart?”]

Alex Ashby:  Our [regional Southeast Asia] Global X FTSE ASEAN 40 ETF (ASEA) also reflects the growing connection between China and Southeast Asia.  The ASEAN region continues to integrate and grow their economies, and in doing so the trade and investment with China is also increasing significantly.  There are mutual opportunities for both in this cross-border trade, and China has already demonstrated its interest in economic cooperation in the form of free trade areas and transportation links to the region.  

Nick Slepko:  Are any of these China ETFs connected to Singapore?

Ashby:  There’s not too much direct exposure to Singapore, but it is growing in influence. Singapore is almost the exact opposite of China.  You have a really small domestic market, so a large part of what companies based there do is to expand into new markets (including China), while also drawing upon the intellectual capital and expertise that Singapore has developed as a major financial hub in the region.

I think the [China Consumer ETF] gives “on the ground” exposure to retailers like Golden Eagle which has a huge presence in China as well as certain automakers like Great Wall Motor.  While much has been written about some Chinese preferences for foreign automakers which are making significant investments in China and there are some products that Chinese are willing to pay premium for foreign brands, there are also a number of domestic brands that are still preferred by the average Chinese consumer.  Often these domestic companies can adapt more quickly to changes in consumption patterns due to their local expertise.

Slepko:  Well, then let’s talk HOG and HOGS.  The gradual entry of Harley-Davidson (NYSE: HOG) into the Chinese market is a story that gets covered disproportionately.  While anecdotal evidence suggests that it is still almost completely unknown in China, one dealer in Suzhou, points out, “You don’t see people tattooing Louis Vuitton or Rolex on them. [Harley-Davidson] is a brand people want to tattoo on their body.”  At the other end of the spectrum the recent acquisition of popular domestic pork product peddler Zhongpin (NASDAQ: HOGS) seems to indicate there are local brands that the Chinese trust.  How does Zhongpin being taken private impact your fund?  Also, can you tell me more about brand preferences in China since that is a big part of consumerism?

Ashby:  Based on the most recent information released by Zhongpin, it appears that shareholders are expected to receive an all cash distribution in connection with the company being taken private – although this is still pending approval and is not expected until 2013.  In this case, the process is essentially the same as if the company was being taken over by a public company.  Once the company is de-listed and taken private, it presumably would no longer be a part of the Underlying Index, and the Index provider would adjust the weightings of the other companies in the Index based on the removal of Zhongpin and the rules of the Index.  As the fund managers, we would use the cash proceeds from Zhongpin to purchase the securities we would need to continue tracking the Index, as per our Fund mandate.

Brand preference in China is a very interesting area and one that the major consulting firms are constantly reporting on – although it can vary significantly by product, the general trend appears to be that affluent consumers are more willing to trade up for foreign and luxury brands, while staple products are often dominated by domestic companies because consumers of these products are more cost-conscious and often prefer local brands.

Slepko:  The Chinese shoe company Li Ning (NASDAQOTH: LNNGF) recently opened up its US headquarters in Portland just down the street from Nike (NYSE: NKE).  Will a Chinese consumer goods company be able to challenge a competitor like Nike globally – or even get a fraction of the US market?  (Maybe it helps Li Ning that Nike is becoming less associated as a homegrown "Chinese brand" since its sourcing from Greater China has been decreasing in recent years.)

Ashby:  Taking on Nike is no small challenge, but smaller companies have been successful in taking some market share from Nike in certain markets – Under Armour (NYSE: UA) is an excellent example, excelling first in the performance wear segment and then expanding into areas like footwear.  There is no reason that Li Ning couldn’t do the same, but it will most likely require (1) a superior product in some particular market and (2) an effective advertising campaign.  These were two main contributors to Under Armour’s success, and Li Ning does have the advantage of a strong market base in China which it could leverage in its expansion plans.   

[continued in The Future of China Investing:  Beer, Gambling, & Children”]

 

 



Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool owns shares of Nike and Under Armour. Motley Fool newsletter services recommend Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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