Consumer Pickup Could Be Short Lived

BMI's Asia Country Risk team believes that the pickup in Chinese economic data in the latter stages of 2013 and beginning of 2014 is unlikely to be sustained. The Food and Drink team believes that the optimism surrounding a Chinese consumer comeback might be premature.

China Resources Enterprises (CRE), the state-owned multichannel consumer goods company, announced on March 20 a mixed set of results for 2013. Though profit fell to a nine-year low, an uptick in revenue across all of its operating segments has sent its shares 2.5% higher at the time of writing. However, in our opinion we suggest that rising growth rates are not likely to be sustained over the near-medium term.

We predicate this view on our belief that the late 2013 and early 2014 pickup in economic growth has been fuelled by a cyclical upswing, which we do not expect to be sustained beyond early 2014. Domestically, the upswing in new liquidity following the mini credit crunch in mid-2013 is supporting investment activity in the traditional sectors of the economy, but this could begin to fade as credit growth is beginning to slow once again. On the export front, the rebound in US and European demand is providing support for now, but we expect China's strengthening currency to begin to undermine exports as 2014 progresses.

Pickup Not For Long
China Resources Enterprises - Revenue Growth By Sub-Sector (% chg y-o-y)

BMI's Asia Country Risk team believes that the pickup in Chinese economic data in the latter stages of 2013 and beginning of 2014 is unlikely to be sustained. The Food and Drink team believes that the optimism surrounding a Chinese consumer comeback might be premature.

China Resources Enterprises (CRE), the state-owned multichannel consumer goods company, announced on March 20 a mixed set of results for 2013. Though profit fell to a nine-year low, an uptick in revenue across all of its operating segments has sent its shares 2.5% higher at the time of writing. However, in our opinion we suggest that rising growth rates are not likely to be sustained over the near-medium term.

Pickup Not For Long
China Resources Enterprises - Revenue Growth By Sub-Sector (% chg y-o-y)

We predicate this view on our belief that the late 2013 and early 2014 pickup in economic growth has been fuelled by a cyclical upswing, which we do not expect to be sustained beyond early 2014. Domestically, the upswing in new liquidity following the mini credit crunch in mid-2013 is supporting investment activity in the traditional sectors of the economy, but this could begin to fade as credit growth is beginning to slow once again. On the export front, the rebound in US and European demand is providing support for now, but we expect China's strengthening currency to begin to undermine exports as 2014 progresses.

As such, domestic and multinational companies with large exposure to the country will likely experience a better half-year (Q413 and Q114) than further into 2014. As well as CRE's results, dairy firm Yili Group, Tsingtao brewery and Kweichou Moutai all forecast significant increases in growth for Q413 compared with Q313 (17.5%, up from 7.3%; 21.9%, up from 11.1%; and 35.3%, up from 12.1% respectively).

The short-lived bounce in economic confidence can be seen in China's Purchasing Managers Index score, which saw expansion in the months of August through to December last year.

Has Worsened Recently
China - HSBC Flash PMI

Our macroeconomic view rests on the belief that the hangover effects of China's economic stimulus are yet to be felt, with cooling credit growth likely to reveal these effects over the coming quarters. As such, our industry view holds that the Chinese consumer sector has experienced a temporary upswing in Q413 that may be felt through Q114. Therefore, appreciation in the market value of consumer companies based on such data could see downside revisions in the second half of 2014.

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Related sectors of this article: Food & Drink
Geography: China
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