3 Chinese Companies Capitalizing on Consumer Caution

Stocks to buy

A recent article in Barron’s about Chinese households opting to save rather than spend suggested that the country would have difficulty pulling out of the economic tailspin it’s been in since the pandemic began in early 2020. That’s terrible news for Chinese stocks.

“An increasingly common belief is that China’s struggling economy, faced with headwinds on a range of fronts—particularly its flatlining consumer sector—is now being hit even harder as households begin paying down their sizable debts,” wrote Barron’s contributor Tanner Brown. 

“This trend of deleveraging is taking money away from the productive area of consuming goods and services and reallocating it to servicing debts, which are mainly in the form of mortgages and credit card bills.”

The article points out that the country’s household debt accounts for 63.5% of China’s gross domestic product (GDP), just 150 basis points away from what the International Monetary Fund says constitutes severe financial instability. 

If that’s the case, it’s increasingly difficult for North American investors to find Chinese stocks to buy. 

Despite the worries, these three corporations are capitalizing on the difficulties. 

China Construction Bank (CICHY)

Illustration of gray steel safe locked with flat blue background, representing safe bank stocks

Source: shutterstock.com/NeoLeo

China Construction Bank (OTCMKTS:CICHY) is China’s second-largest commercial bank with 38.25 trillion Chinese Yuan ($5.3 trillion) in total assets, 27.6 trillion Chinese Yuan in deposits ($3.9 trillion), and 23.1 trillion Chinese Yuan ($3.2 trillion) in loans. 

The bank’s stock has not performed well. Over the past five years, it’s down nearly 31%, 57% worse than JPMorgan Chase & Co. (NYSE:JPM) on a relative basis. 

Approximately 56% of its loan portfolio is to corporations and businesses, with the rest from personal loans (36%), invoice discounting (3%), and overseas operations (5%). The bank’s credit impairment losses in the first half of the year through June 30 were 96.0 billion Chinese Yuan ($13.3 billion), or 0.42% of its outstanding loans. That was down 7.63% from the same period a year earlier.

Analysts like it. Of the 27 covering it, 23 rate it Overweight or an outright Buy, with an average target price of $18.66, considerably higher than where it’s currently trading. 

I like it because it does an excellent job controlling its expenses. In the first half of the year, its cost-to-income ratio was 23.72%, which means for every $1 in operating income — 388.2 billion Chinese Yuan ($54.1 billion) — its operating expenses are less than 24 cents.

It is far cheaper on a valuation basis than JPM if you’re looking for a bargain.

Miniso Group Holding (MNSO)

red Miniso (MNSO) sign glowing at night

Source: shutterstock.com/Hendrick Wu

Miniso Group Holding (NYSE:MNSO) is a Chinese-based omnichannel retailer founded by Jack Ye in 2013 that specializes in affordable, well-designed, quality products. Today, it has more than 5,700 stores in more than 100 countries.  

After floundering for most of 2021 and 2022, MNSO stock has taken off in the past year, up by roughly 358%. 

The business is performing at a very high level. In August, it released its Q4 2023 and full-year results. Full-year revenue was $1.58 billion, 13.8% higher than a year earlier. Its adjusted net profit for the year was $254.3 million, 155.3% higher than in 2022. Its adjusted net margin was 16.1%, 890 basis points higher than a year ago. It finished the year with 2,187 stores outside China, 214 higher than in 2022. Its China stores account for 62% of its entire footprint, with international stores accounting for the remaining 38%.

I like Miniso because it has a second sub-brand called Top Toy — which specializes in toys for children and young adults — that it launched in China in December 2020, opening nine stores in the country. As of June 30, it had 118 locations open worldwide, of which 109 were third-party franchised locations. 

The franchisee model gives it significant control over the entire sales process because it owns the inventory until the third-party operators sell it. It gets an agreed-upon percentage of sales similar to franchise royalties. It also receives a fee for overall store management, a hybrid of the corporate and franchised retail business models. 

The average selling price of products in its China stores is 12.8 Chinese Yuan ($1.78), ensuring that business remains brisk even with people saving more.

Yum China (YUMC)

A banner for Yum China (YUMC) decorates the New York Stock Exchange.

Source: rblfmr / Shutterstock.com

Yum China (NYSE:YUMC) was spun off from Yum Brands (NYSE:YUM) on Nov. 1, 2016. Shareholders, as of Oct. 16, 2016, received one YUMC share for every YUM share held. YUMC shares are up 124% since becoming an independent company. In the nearly seven years since, YUM is up 109%, slightly less than its former China stablemate but ahead of the 102% return for the S&P 500.

The restaurant operator finished Q2 2023 with 13,602 stores, up 12% over Q2 2022 and 55% over Q2 2019. It opened 422 stores in the second quarter, significantly higher than previous second quarters. KFC accounted for 70% of its overall store footprint, Pizza Hut (23%), and Taco Bell, Lavazza, and Little Sheep accounted for the rest. 

As KFC goes, so goes Yum China. 

Analysts like YUMC stock. Of the 29 that cover it, 25 rate it Overweight or an outright Buy with a $75.03 target price, 35% higher than where it’s currently trading.

I like it because the KFC restaurant margins are so darn appetizing. In the first two quarters of 2023, they were 19.9%, 550 basis points higher than 2022, and 150 higher than 2021. 

Like Miniso, Yum China’s price point means it can do well even during times of economic slowdown, making it somewhat recession-resistant.  

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

Articles You May Like

Federal Reserve proposes more transparency in bank stress tests, but banks still sue
The Mega Millions jackpot is now $1 billion — but that’s not the only reason lottery sales could see a holiday spike
Trump is attacking the wrong deficit if he hopes to right the economy
Top Wall Street analysts recommend these dividend stocks for higher returns
My Top 10 Stock Market Predictions for 2025