Three of China’s home-grown brands to buy now

The rise of domestic consumption is the bedrock of the investment case for China, and many investors believe Western multinationals are the best way to tap these new consumers.

We have sympathy with this view and recognise that some Western firms – such as Yum! Brands, which owns fast food chain KFC – are well positioned to do this.

Yet, we believe investors are missing a huge opportunity to tap in to local companies that really understand local (often regional) consumers’ tastes.

These strong brands often have long-established, deep distribution networks that give them an enduring competitive advantage over foreign brands.

One successful privately owned home-grown brand is the Great Wall Motor Company (Hong Kong: 2333). It hails from Baoding in Hebei Province and has emerged as China’s leading sport utility vehicle (SUV) brand.

SUV sales have jumped from more than one million units in 2010 to more than three million in 2013. As the industry leader, Great Wall Motor has delivered strong growth in the expanding market as well as a strong five-year run for the stock.

However, in the last six months, it has hit growing pains. Profit margins have fallen while research and development is stepped up, and the launch of the new H8 was delayed. Consequently, investor sentiment has cooled dramatically.

Now, though, valuations are back to attractive levels for a strong brand that is well positioned for a multi-year trend of growing SUV popularity.

Few Chinese companies have successfully taken their brands global, but PC and notebook company Lenovo (Hong Kong: 992) has succeeded in doing so. Lenovo has used a leading brand at home to generate strong cash flows to invest in savvy acquisitions of foreign brands. Combined with efficient manufacturing, this has allowed it to take market share in the global PC market.

More recently, Lenovo has developed the technology to benefit from the growth of smartphones in China. Its new Yoga Ultrabook has received good reviews, in turn making Lenovo a competitor in the global tablet market.

In 2014, the company has been busy announcing sizable merger and acquisition (M&A) deals to buy IBM’s server business and Motorola from Google. Given Lenovo’s excellent track record of integrating businesses, we believe the company is now even better positioned to grow in China and abroad as a genuine technology brand.

The reform measures announced at the November 2013 Communist Party Plenum mark a major change in philosophy. President Xi has embarked on an anti-corruption crackdown that has seen lavish government spending budgets cut dramatically and is now turning his attention to waste and inefficiencies in state controlled businesses (SOEs).

We are starting to see monolithic SOEs in the energy and telecom sectors cutting capital expenditure budgets and raising dividend payout ratios.

In addition to shaking up SOEs, President Xi is introducing more market forces into the economy, including the liberalisation of interest rates and financial markets. Private investors in Britain can’t access the local A share markets in Shanghai and Shenzhen, but they can buy shares in Citic Securities (Hong Kong: 6030), which is China’s largest stockbroker.

The company is also listed in Hong Kong and stands to benefit from financial reforms and any pick up in sentiment in the local market.