China offers glimpse of life after lockdown – analysis from @ASInvestmentsUK Nicholas Yeo

By Nicholas Yeo, Head of Equities, China, Aberdeen Standard Investments

China delivered a startling reminder of what a post-pandemic world might look like, setting a new record high for domestic tourism during its Labour Day holiday this month.

The national May 1-5 break saw 230 million Chinese citizens make in-country trips[1] – the equivalent of more than half of the entire European Union on the move in just five days. The figures should do much to help restore investor confidence in China’s growth potential.

A record 44 million Chinese tourists flooded back into cinemas over the holiday, capitalising on reduced ticket prices to register Rmb1.7 billion ($263 million) in box office takings.

The southern Hainan province – a mecca where Chinese tourists can claim tax refunds on the purchase of luxury goods – recorded a 20% hike in visits versus pre-pandemic levels in 2019. Its duty-free stores attracted 121,000 shoppers and $154 million in spending over the break[2].

The top 10 holiday attractions included Shanghai Disneyland theme park, the Summer Palace gardens in Beijing and the giant panda bear breeding centre in Sichuan. Online travel data shows two-thirds of tourists were aged 35 or below and a third were families.

In total, tourist numbers were 3% higher than the pre-pandemic high set during the nation’s Golden Week holiday in October 2019 – months before the deadly coronavirus emerged.

Although total tourist revenue of $17.5 billion across the five-day break was a dramatic improvement on last year, it was 23% below 2019 levels[3]. This is likely partly attributable to the fee waivers and spending coupons dished out to encourage a revival in social activities.

Authorities set the stage by accelerating their Covid-19 vaccine rollout in late March. Now China is reported to be administering seven million doses a day. It is on track to have vaccinated 40% of its population by July and two-thirds by the end of September.

The fast-improving outlook for consumption and company earnings is a far cry from just a few months earlier, when authorities had to urge citizens to refrain from non-essential travel over Chinese New Year in February after a mini-spike in Covid-19 cases.

It was a period that also witnessed a sharp stock market correction as China’s central bank moved from loose to neutral monetary policy in response to the nation’s economic rebound.

Fear of monetary tightening led investors to rotate out of growth-orientated sectors in favour of value and cyclical names. The consumer staples sector sank 23% in the month after Chinese New Year, with health-care stocks also tumbling 23% and consumer discretionary stocks falling 16%[4].

However, using conventional monetary tools to reduce market liquidity was not really a case of tightening, but of returning policy to a more neutral stance. Orthodox policy is something China retains, but which seems long forgotten among developed market central banks.

By mid-March, Chinese authorities lifted domestic travel restrictions. Citizens now no longer even refer to reopening, so quickly has life returned to normal in all but overseas travel. That – allied to the vaccination drive – has done much to bolster consumer and investor confidence.

Many high-quality consumer companies have enjoyed a subsequent pick-up in share price. But encouragingly for investors, a number of high-quality names remain 15-25% cheaper today than before Chinese New Year – with fundamentals that are largely unchanged.

Looking ahead, we see every reason for investors to be positive about prospects for China’s A-shares market. The nation’s economy is forecast to expand more than 9% this year.

Exports are rising and recent data – notably from the Labour Day holiday – is encouraging. The earnings outlook for Chinese firms looks promising and, importantly, we view these earnings as of higher quality than for companies in many other markets.

Share buybacks have become commonplace among S&P500 companies, for example, often funded by cheap credit. In contrast, China has a bias to deleveraging and is trying to lower financial risk.

What’s more, compared to the S&P500, Chinese A-shares today are almost 50% cheaper on a price-to-book basis and more than 30% cheaper on a price-to-earnings metric[5].

We remain big believers in China’s premiumisation story – that urbanisation and rising middle-class wealth will drive demand for premium goods and services over the long term. Our favoured areas include health care, wealth management, insurance and luxury goods.

We also anticipate growth in cloud computing, 5G, gaming and delivery services on the back of changing work and consumption patterns due to Covid-19, and in renewable energy amid supportive government policies.

Labour Day has given investors every reason to feel positive about China again, and what life might look like for all of us after lockdown.

[1] China Ministry of Culture & Tourism

[2] Goldman Sachs Equity Research

[3] Citi Research

[4] CSI300 Index, 10 Feb – 19 Mar 2021, Bloomberg, Aberdeen Standard Investments

[5] Bloomberg, Aberdeen Standard Investments, 7 May 2021

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