Insights

3 Companies That Could Benefit From China’s Rising Incomes

As China’s less-developed regions see rising incomes, demand for the products of these three companies could increase if management executes. – China's homegrown local brands investing

According to analysts, China will become a “high income” country with a GDP per capita of over US$12,600 per year in the early part of this decade.

Some parts of China, either due to policy or geography, are already past that level. In Shenzhen, the GDP per capita is almost US$30,000 per year, for example.

However, other parts of China, particularly in the country’s western regions, have a lot of catching up to do and the per capita figures can be a lot lower.

While many parts of China are still less developed, there is an opportunity for businesses.

As China continues to grow, the less developed parts of China will develop and some companies such as Pinduoduo Inc (NASDAQ: PDD), Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988), and Xiaomi Corp (SEHK: 1810) could be in a position to benefit.

Here’s how each could potentially benefit if they execute well.

1. Pinduoduo

Pinduoduo, one of China’s leading e-commerce companies, is especially popular in China’s less developed areas because many items found on the company’s social group buying app can be really cheap.

Given limited budgets, Pinduoduo’s cheap prices make it very competitive.

Pinduoduo benefits from the development of China’s less developed areas in that the company could presumably find it easier to sell more expensive items over time as incomes in those regions rise.

As a result, Pinduoduo’s gross merchandise value (GMV) could increase. With more GMV comes more revenue-generating opportunities.

Although it will benefit from the trend, Pinduoduo still needs to execute in terms of producing the profits that the market expects and holding onto market share as competition rises.

Some analysts think more “automatic” companies like Alibaba could be better bets.

2. Xiaomi

Xiaomi is known for selling quality phones at competitive prices.

In 2018, the company announced its intention of having an after-tax net profit margin of no greater than 5% for its hardware business, which includes smartphones and Internet of Things (IoT) products.

Given its competitive prices, Xiaomi has many customers in China’s less developed areas.

Rather than make money on the hardware, Xiaomi has strived to make money on services, which are typically higher margin.

As China’s less developed areas develop, Xiaomi could presumably find it easier to sell more services.

For Xiaomi to really benefit from the trend, however, the company will need to keep its share of users.

In the past Xiaomi has lost market share in China as companies like Huawei have become more competitive.

3. Alibaba

Alibaba is in a great position to benefit from the development of China’s less developed areas. According to Alibaba’s March quarter earnings transcript:

“780 million of annual active consumers in China account for around 85% and 40% of the Chinese population in developed and the less developed areas.”

Given the disparity, Alibaba has a lot of potential growth both in terms of user growth and in terms of GMV from China’s less developed areas.

Considering Alibaba’s extensive ecosystem, the company could find it easier to sell other services to its new users in those regions too.

In terms of its execution in the less developed areas, Alibaba is doing a good job.

For Alibaba’s December 2019 quarter, more than 60% of the company’s new annual active customers in China came from less developed areas, for example.

Foolish bottom line

Pinduoduo, Xiaomi, and Alibaba could all be in a position to benefit from the development of China’s less developed areas over the coming years.

As incomes rise in these areas, demand for e-commerce products and higher performance devices will very likely rise too.

Of the three companies, I think Alibaba might be the best bet given its combination of numerous competitive advantages, profitability, and strong future growth prospects.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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