Noodles and shoes: Chinese consumer plays

US consumers look like they will finally begin to tighten their belts this year. And difficulties in the US economy could drag down global growth. In such an environment, it seems a good idea to turn toward companies in China that don’t depend on exports and are also not directly linked to global economic trends. The most pessimistic forecasts for Chinese economic growth in 2008 still call for 9% GDP growth, down from 11% in 2007, but still quite a healthy level.

Following on the theme of companies targeting domestic Chinese consumers, the Red Cat Journal lists two such plays below. Valuations are not necessarily low but these are two of the higher quality consumer plays in China. Tingyi (0322.HK) trades at an estimated P/E of 37x on 2007 earnings. For Anta Sports (2020.HK), P/E on 2007 earnings is 30x. Some analysts expect earnings growth of up to 30% for Tingyi in 2008, and 47% for Anta. An opportunity to enter these two shares may come if Hong Kong shares continue to fall. These are two the Red Cat Journal would be keeping an eye on.

  • Tingyi (0322.HK): Tingyi is the largest instant noodle manufacturer in China. It also distributes beverages, rice crackers and other flour-based products in China. A risk for the company is the potential for margin compression if commodity prices continue to rise, especially since pricing power is limited.
  • Anta Sports Products Limited (2020.HK): Anta Sports is a major branded sports footwear enterprise. The company designs, manufactures and sells sports shoes and sports apparel through its own retail stores and also through distributors. Its products are targeted mainly at the mid to low end of China’s sports industry. Risks include the possibility that the company’s retail division remains unprofitable and the possibility that foreign brands expand into second and third tier cities in China, increasing competition.