China investment fundamentals continue to stack up, says Lombard Odier’s Didier Rabattu
Didier Rabattu, head of Global Equities at Lombard Odier Investment Managers, and manager of LOIM’s Emerging Consumer fund, sees promise in Chinese beer consumption.
Investors can’t afford to ignore China. It has been the world’s largest and most important economy for most of the last 3,000 years and – although Europe and the US may have temporarily overtaken it – it is swiftly regaining this dominance. In population terms, it is as big as Europe and North America put together, and that population is young, growing quickly and increasing wealthy. The average yearly salary in China has increased by almost five times since 1999.
The growth in domestic consumption is a multi-year, even a multi-decade trend. We are looking to invest in the Chinese equivalents of stocks like Coca Cola – retail or FCMG companies that are well-managed and number one or two in their categories, and which will reap the benefits of consolidation, infrastructure improvements, consumer trends and rising disposable incomes, year after year.
We have recently increased our allocation to China since equities are starting to look good value again. Companies we like include China Resource Enterprises, which we added to the portfolio in April. CRE is the leading beer company in China through a 20-year old joint venture with SAB Miller called Snow, which has 22% market share. In the beer segment, the integration of many acquisitions in recent years and the introduction of the Snow brand into new local markets leads us to believe that there is potential for the EBIT margin to increase from the current 8.7%, via additional operating leverage and because the Chinese beer market is consolidating. The Chinese beer market is still in its infancy compared to the US, so we see considerable potential for further growth and consolidation. Currently, beer consumption in China is 30 litres per capita, compared to over 80 in the US.