Concerned about the Consumer? Look at What China Wants

20-Aug-2011

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

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by Darcy Travlos,, Forbes,

Investors concerned about a potential US “Double Dip” ought to focus where the growth is:  luxury brands with exposure in China.  One of the brightest candidates with great potential is Apple.

Luxury good demand in Asia Pacific generally, and China specifically, is driving revenues and profits of some of the world’s splashiest brands.  Take a look at some selected data points:

  • Adidas increased 2011 guidance to 10+% growth, previously in the “high single digits” after H12011 sales increased 14%.  Sales to China were up 38% over H12010.
  • Tiffany Q12011 worldwide sales were up 20%, driven largely by the growth in Asia Pacific of 37%.
  • PPR, conglomerate made up of luxury brands including Gucci, Yves Saint Laurent, Alexander McQueen, Balenciaga, etc. had strong results “boosted by tourism from Asia.”
  • Porsche operating profit up 59% in H12011 due to a boom in emerging markets, “especially China.
  • LVMH experienced double-digit growth in revenue and profit for H12011.  The Louis Vuitton brand drove earnings, “largely in China.”
  • Apple, too, saw its revenues in China (defined as Mainland, Hong Kong, and Taiwan) up 6 times in the first nine months of 2011 compared to the year earlier.  Moreover, the four stores in China have the highest average revenue per store of any other region geography for Apple.

The growth can be expected to continue, if only due to the sheer size of the growing middle class in China.  In 2010, China surpassed the US as the largest car market in the world.  In 2009, the size of the middle class in the US was 338M the size of the middle class in the Asia Pacific was 525M.  By 2020, the US middle class will be roughly the same size while Asia Pacific’s middle class will be the largest with over 3 times the size at 1.740B (54% of global share) with the greatest purchasing power.

Apple’s total addressable market inside China is also highly anticipated to increase.  Today, iPhones comprise over half of Apple’s revenue, making iPhones the largest driver of growth. Today, iPhones are sold officially through China Unicom, China’s second largest carrier with 181.6M subscribers.  That said, Apple and China Mobile, the largest carrier with 611M subscribers, and Apple and China Telecom, with 105.7M subscribers, have been rumored in talks for quite a while.  Many expect announcements from both by the end of the year to officially sell iPhones.  Regardless, 5.6M prepaid or unlocked iPhones are already operating on the China Mobile networks.   This broadens out Apple’s addressable market by over 700M subscribers…for a high-margin product that, in contrast to the other luxury items, is also a useful productivity and connectively tool.

Apple has plans to open a store in Hong Kong next quarter and another in Shanghai by the end of the year, further increasing its exposure.  If investors are wary of the US consumer, they should look toward growth catalysts where growth is and, for now, it is in China’s emerging middle and upper classes.

 

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