Consumption upgrade bolsters long-term outlook for A shares

Makers of Chinese liquor, appliances, foods, beverages and interior decor to benefit big time

Investors holding a long position in stocks of consumption-related companies in China's A-share market will likely reap rich dividends over the long term, given such companies' outstanding sales and strong financials in the first quarter, market insiders said.

A long position refers to the buying of securities such as a stock, currency or commodity in expectation that their value will appreciate.

In the first quarter, shares of legendary Chinese liquor baijiu-maker Kweichow Moutai soared more than 42 percent year-on-year, far more than the 24-percent year-on-year rise in the benchmark Shanghai Composite Index.

Data from Shanghai-based market tracker Wind Info showed shares of companies in the food and beverage sector rose more than 43 percent year-on-year on average, the third-largest rise after IT and agriculture.

Shenwan Hongyuan Securities tracked 23 F&B companies and found net profits of 13 of them rose by 20 to 50 percent year-on-year. Another nine companies registered positive but less-than-20-percent growth in profits. Only one company is expected to report a loss.

So, investors holding stocks of consumption-related companies should continue to do so, given the prospects of a further rise in their value in the future, analysts said.

Lyu Chang, senior analyst at Shenwan Hongyuan, said the ongoing consumption upgrade and consolidation of brands are shaping growth prospects of Chinese liquor companies.

As the Chinese A-share market becomes more international, there is still much room for growth for established liquor brands, she said.

Home appliance-makers also saw robust growth in the first quarter. Wind Info data showed that shares of companies in the sector surged more than 34 percent year-on-year on average in the first quarter.

Analysts from GF Securities wrote in a note that the market valuations of Chinese home appliance companies are at a similar level as that of their overseas counterparts.

But the A-share listed home appliance companies have shown better asset quality, given their rapid growth, higher productivity and management efficiency.

Stocks of leading A-share home appliance companies are better investment targets in a global context, and in terms of value as they promise more room for growth.

Analysts from Shanxi Securities further explained that the leading Chinese home appliance-makers have accelerated their overseas mergers and acquisitions.

The M&A activity has helped them to exploit the acquired companies' distribution channels and technologies. In this sense, Chinese manufacturers can scale up by seizing a higher market share, both domestically and overseas.

Using stock connect mechanisms between Shanghai, Shenzhen and Hong Kong, overseas investors have targeted China's A-share market. The F&B sector has been the most heavily invested one－overseas investors hold more than 20 percent of the sector's floating stock.

Shares of home appliance-makers come in second with overseas investors holding nearly 11 percent of the sector's floating stock.

Yin Wentao, senior investment consultant at China Galaxy Securities, said overseas capital inflows have remained stable, thanks to the increased weighting of A shares in the MSCI.

With Chinese stocks likely to be included in the FTSE Russell, and given the highly anticipated stock connect between Shanghai and London, consumption-related stocks in the A-share market will remain strong in the long term, he said.

Yin suggested that leading manufacturers that make consumer products related to the property industry, like home furnishings, bathroom vanities and household textiles, are likely to show more growth this year.

Michelle Qi, chief investment officer for equities at Eastspring Investments in China, said the consumption sector will show robust growth in the long run as a result of the economic restructuring going on in the country.

"As people's incomes increase, they will attach greater importance to food safety and product diversity."