There are signs that the luxury market in China has matured and growth will start to stabilize. The market that's growing faster is the rough-n-tumble middle class. They aren't buying H Stern iPhones with diamond studs. But they are subscribing to wireless services. They are traveling. They are buying no frills laptops.
Some evidence of the lackluster luxury market was reported recently during a China's Golden Week holiday. Less people were out shopping for Prada handbags. More people were taking road trips through the country.
China's love affair for luxury is maturing. This may prove problematic for those companies that have become increasingly reliant on the nation’s spending power. But, says Magdalene Miller, investment director of emerging market equities at Standard Life Investments, that opens up opportunities for other firms to gain a greater share of the Chinese consumer’s wallet. Her favorite sectors at the moment in that regard happen to be tech companies, mainly the smartphone operators and manufacturers.
One of her middle class boom faves is China Unicom (CHU), the nation’s second largest mobile operator. It has had a lousy year on the stock market, down over 18 percent year to date, but is up 38.7 percent in the last three months. China Unicom is an example of growing demand from the middle classes. It's enjoying strong subscriber growth for its 3G services, adding around 2.9 million users each month since the start of the year, giving it a 36 percent share now of 3G net additions. This is significant progress considering Unicom’s revenue market share of 3G subscribers was just 16.5 percent in the first quarter of 2012, Miller said in a note to clients.
The growing demand among China's middle classes for smartphones and wireless services is also a positive driver for PC and handheld-device maker Lenovo. That stock is up 21.8 percent year to date and 6.4 percent in the last three months. Where's the hard landing, again?
Lenovo is the old IBM Think Pad. It remains predominantly a PC specialist by its roots, but it is starting to focus on tapping in to the high-growth
smartphone market in China. The company is planning to ramp up its smartphone volumes, with a target of 18 million units in 2012. It is also targeting the fastest growing niche of cheap, zero luxury, no frills cell phones. Miller said she expects Lenovo to continue to grow its 10 percent market share as it spreads its offering to other mobile carriers.
China has been known lately as the world's leading luxury market. Ferrari sells more cars there than anywhere else. Prada is listed on the Hong Kong stock exchange. Louis Vuitton has huge -- jam packed -- stores in Hong Kong, as well. But as China learns the importance of the middle class, companies that cater to this core group are doing fairly well despite the economic slowdown.
China Life Insurance Company (LFC) is up 23.4 percent year to date. Tencent Holdings (HKG: 0700), China's large e-commerce and gaming site, has outperformed Apple and is up 66.67 percent this year. China Mobile (CHL) is up 11.6 percent.
While this may very well be a case of picking your spots, there are a few middle class focused every day names that have underpeformed. Search engine Baidu (BIDU) is down over 3 percent year to date.
Nevertheless, most big funds are keen on investing in China because of this trend. The conspiracy of a crash landing is just that. Somebody has to trust the data somewhere, and clearly firms like Standard Life, USAA, Ashmore Group, Schroeders, Barclays and Nomura do. These are markets not to be missed for long term investors. And in these sectors of China's economy, a soft landing call is not going to be anyone's famous last words.
