Trading up for premium in China

China's USD 1 trillion+ consumer market is at the heart of the economy and Chinese consumer's passion for premium brands is growing, making it an unmissable investment opportunity.

28 Nov 2018

Old Shanghai travel guides list a food street off the Nanjing Road shopping hub, but if you go there today for a RMB 7 (USD 1.10) cup of hot soybean milk … you'll be in for a surprise.

That's because the street has been demolished. In its place, you'll find a new 30,000 sq.ft three-storey premium coffee roastery offering a RMB 48 (USD 7.60) Nicaraguan blend Americano, plus craft beers, store-baked breads, and augmented reality customer experiences.

And while you may balk at the change, Shanghai residents don't mind. In fact, they're going in droves and any local will tell you about the morning queues. And this transformation is typical of a consumer demand shift happening in China.

Chinese consumers are trading up

That's because Chinese consumers are trading up – accepting higher prices and buying premium, value-added, products across a whole range of categories, and not just coffee. And they're doing it for social status, healthier lifestyles, improved personal appearance and an alternative to mass-market brands.

Geoffrey Wong, UBS-AM Head of Emerging Markets and Asia-Pacific Equities believes that identifying the companies that are benefiting can be very interesting. He says: "If we look at sales of cars in China, it is not that fast, it is about 3.5% growth per year, but if you look at sales of premium cars like BMW and Mercedes-Benz, these are going at 15% to 25%, so there is much more growth in the premium end".

The same thing happens in even more modest goods like beer. Low-end beer is actually shrinking in sales in China but premium beers are rising at 15% per annum.

So identifying those companies selling into the premium end of the market is an interesting investment idea.

Trading up across sectors

But while it's one challenge to recognize these trends, it's another to capture them. That's where an active approach to stock selection and investment management can definitely create value for investors.

UBS-AM's China Equities team is staffed by China specialists with a track record of recognizing these trends via their 'boots-on-the-ground' approach to research and delivering strong performance.

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