China property slowdown tipped to hit luxury consumption

Magdalene Miller, manager of SLI’s China Equities fund, expects China’s nouveau riche to ease luxury spending as the property market softens.
China property slowdown tipped to hit luxury consumption

China’s nouveau riche are being tipped to slow spending on luxury goods amid expectations of a softening domestic property market, where many of them accumulate their wealth.

Magdalene Miller, investment director of Standard Life Investments (SLI), tells AsianInvestor she is taking a cautious view about consumption of luxury goods, contrary to widespread investor views.

“A significant percentage of rich Chinese accumulate their wealth through investing in the property market,” she notes. “While the government continues to exert control, we expect [real estate] transaction volumes to go down and inventory to go up. This may impact the new rich class’s spending power on luxury goods.”

Since April 2009 Miller has been fund manager of SLI’s China Equities fund, a Sicav incepted in 2005. Its main investors are institutions and wealthy individuals and families in Europe.

Miller is of the view that Chinese equity investors’ expectations about luxury consumption stocks are too high.

“The valuation of high-end department stores, watch [businesses] and jewellers are around 15 to 20 times price-to-earnings multiples, while auto-makers are trading at seven to eight times,” she points out.

Of course, Miller is aware that leaders in Beijing will continue with their pro-domestic consumption macro policy, and as such she says SLI is overweight IT, consumer discretionary and healthcare, and underweight financials, property and energy.

In terms of investment philosophy, SLI tends to focus on companies with growth potential or that are undergoing structural development. “A positive structural story will help to ride out cyclicality, especially in the current highly volatile market,” she says.

The number one stock on her top 10 active overweight list for the China Equities fund is 51job Inc., the leading recruitment agency listed on Nasdaq.

Highlighting its potential, Miller notes: “The percentage of online recruitment [in the whole jobs market] is absolutely tiny in China, compared with 50% in the US. And it is a direct beneficiary of rising wages in China.”

The country’s burgeoning automobile sector is a growth story that has not escaped Miller either. “Great Wall Motor is in the SUV [sports utility vehicle] segment, which still has ample room to grow. In the US, SUVs account for 20% of total car sales, while in China the number is half of that. Not only is car ownership very low in China, SUV penetration is even lower.”

Accordingly China ZhengTong Auto Services – the leading luxury car distributor in China for top names such as BMW, Audi, Land Rover, Jaguar, and Volvo – is also on Miller’s top 10 list.

She says sales of luxury cars first started to soar in China two years ago, and fully expects car dealers to make a lot of money for the third consecutive year.

Miller adopts a bottom-up approach and focuses on cash-rich companies rather than those with a high amount of leverage, reflecting concerns that liquidity will continue to be tight in China.

“We see another difficult year to come, but there are still investment opportunities with companies that are improving their operations and earnings quality rather than just riding on a positive macro trend,” Miller adds.

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