Translated by Andrew Vanburen from a Chinese-language piece in Chongqing Commercial Post
THE WORLD’S MOST famous investor said China may already have its own version of the world’s most famous brand – Coca-Cola.
Warren Buffett was responding to a question from the Chinese press during Berkshire Hathaway’s AGM in Nebraska last week about when the world’s biggest country might successfully develop a consumer brand with the cache of a Coca-Cola.
The “Oracle of Omaha” advised the reporters not to sell China short, adding that more than a few PRC-based firms were on a Coca-Cola-esque trajectory.
“How long will it be before we’ll see a Chinese Coca-Cola,” the reporter asked.
“We prefer Chinese firms with a strong export performance, especially in the consumer sector. The PRC already has a few giants in this area whose market value will eventually surpass their US peers,” Buffett replied.
So who might the octogenarian investor have in mind?
At present, the top 20 A-share listed Chinese consumer plays are heavily represented by beverage firms, but also include apparel retailers, automakers, home electronics names and department stores.
Distilled spirit giant Kweichow Moutai Co Ltd (SHA: 600519) with a market capitalization of 243 billion yuan tops the list, and it also just so happens to have a rather aggressive global marketing strategy, though it still lags far behind Coca-Cola in terms of a worldwide presence.
In addition, Coca-Cola’s market cap is a prohibitive 174 billion usd (1.1 trillion yuan), over four times that of Kweichow Moutai.
Other big-time consumer plays in China’s top tier include fellow tippler favorite Jiangsu Yanghe Brewery (SZA: 002304), another spirit maker, as well as domestic rival Luzhou Laojiao (SZA: 000568).
However, with three of China’s top A-share listed consumer stocks focused on the production of 80 proof Chinese-style liquor, it is hard to imagine that such a commodity would have widespread global market potential, thus hampering their attempts to be the next Coca-Cola in terms of worldwide brand recognition.
Therefore, these three hardly meet Buffett’s requirement for having a “strong export performance.”
According to the “Oracle of Omaha’s” requirements for a potential global-brand caliber performance, a firm needs to be focused on the retail sector, have a strong global sales outlook, enjoy a competitive market position and have a high-value brand name.
There are at least ten China-listed consumer plays that roughly fit this description, all of which have a minimum threshold market cap of 20 billion yuan.
Gree Electric Appliances Inc (SZA: 000651) focuses on air conditioners and air purifiers. Its 2011 operating revenue jumped 37.4% to 83.5 billion yuan producing a 22.5% bottom line rise to 5.2 billion. Analysts recently said China’s No.1 air conditioner brand has the core technology and competitive strengths to stay on top.
Yantai Changyu (SZA: 000869) makes less potent wines and brandies than its liquor counterparts. Its net profit rose by a third last year to 1.9 billion yuan. Analysts said the firm’s sales are relatively slowdown-proof and the winemaker’s capacity expansion campaign is on track.
Tsingtao Brewery (SHA: 600600) is China’s best-known beer brand abroad. Sales at home have been no slouch either, rising 16.4% last year to 23.2 billion yuan. Analysts say that after the current round of M&As in the industry and capacity buildup, Tsingtao should emerge even frothier.
GD Midea (SZA: 000527) is a fierce rival to Gree in the air conditioner sector, but is much more diversified, also offering a wide array of home appliances including fans, rice cookers, dishwashers, microwaves and refrigerators. Its top line rose 25% last year to 93.1 billion yuan, and analysts expect Midea to exhibit long-term stable growth on growing domestic demand.
Yili Industrial (SHA: 600887), China’s leading dairy name, managed to boost its 2011 bottom line by a whopping 133% to 1.8 billion yuan. Grain-fed dairy cattle products have the potential to become the earnings driver down the line for Yili, analysts said.
Yunnan Baiyao (SZA: 000538) saw its 2011 net profit rise 30.7% to 1.2 billion yuan on strong sales of traditional Chinese medicines (TCM). Analysts expect orders to increase during the 12th Five-year Plan amid government support for the sector and rising domestic spending.
Qingdao Haier (SHA: 600690), another direct rival of Gree and Midea in the home electronics sector, upped its bottom line last year by 20.1% to 2.7 billion yuan. Analysts say the firm’s commitment to unveiling new products and more technology will help it stay on top.
Shanghai Metersbonwe Fashion (SZA: 002269) is one of three apparel firms in the top ten. Its 2011 bottom line shot up nearly 60% last year to 1.2 billion yuan on rising domestic sales and an aggressive marketing campaign. Analysts expect its net profit to grow at around 22% over each of the next three years.
Youngor Group (SHA: 600177) sells its shirts, suits and casual wear at home and abroad. It suffered a 34% bottom line decline last year to 1.8 billion yuan.
Zhejiang Semir Garment (SZA: 002563) outpaced rival Youngor, increasing its 2011 net profit by 22% to just over 180 million yuan.
So there you have it.
These are the most likely listed firms in China's consumer sector to become the next Coca-Cola, if Warren Buffett’s criteria are to serve as a guide.
Whether or not his prediction is realized will depend on how imaginative these firms will be in terms of pricing, marketing and promotions.
Regardless, with three liquor makers a vintner and a brewer in the mix, at least investors will remain in high spirits.
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