Want To Invest In The Next Amazon? Look To China

November 15, 2017

Want To Invest In The Next Amazon? Look To China

  • The Chinese e-commerce environment has been booming and is expected to continue to do so.
  • I’ll describe the most important trends to look for in potential investments.
  • It’s highly likely that a rising tide will raise many boats, but run when it shifts.



Introduction

E-commerce has been developing the world over in the past 20 years, and the clear winner in the game has been Amazon (NASDAQ: AMZN). AMZN’s stock performance has also been stellar.

Figure 1: AMZN stock price chart since IPO. Source: Yahoo Finance.

This happened as a result of a booming e-commerce environment in the U.S. where AMZN was simply the best company positioned to take advantage of it.

Figure 2: E-commerce has increased 25-fold in the last 20 years. Source: FRED.

To find similar investments now, we have to look at other markets that have similar potential, or perhaps even more potential. I’m talking about the Chinese e-commerce market.

In today’s article, I’ll analyze the Chinese market to show you where the opportunities are and also where the threats lie.

The Chinese e-commerce environment is special for the following reasons:

  1. It is changing from a sellers’ market to a buyers’ market.
  2. Large retailers are trying to scale their consumer base by expanding to everything and creating a complete ecosystem. Cross industry activities will bode well for small niche players which will become targets for those companies that decide buying is better than building.
  3. The focus in on digitalization and omni channeling.
  4. The supply chain management is becoming the key to retailer competitiveness.
  5. Capital investments are still large—especially in rural areas—for fresh products and cross-border, there’s still room for M&A to increase efficiency.

The Chinese retail market has been growing at a 10% rate over the last several years. It is beginning to slow down a bit, but is still strong and is expected to surpass the U.S. retail market by 2019. China’s e-commerce retail market overtook the U.S. in 2014.

Figure 3: Chinese retail market growth. Source: Deloitte.



What’s very important here is that the global e-commerce market is still relatively small as it only made up just 7% of the total retail market in 2015, and is expected to grow to 12% by 2019.

The strong growth in global e-commerce is also important for Chinese e-retailers because they have an eye for expanding globally.

Figure 4: Global e-commerce growth. Source: Deloitte.

The most important thing is that the Chinese e-retail environment is strong and shows no signs of stopping.

The decrease in growth rates is due to the scale of the market. The bigger it gets, the slower it will grow. But a 20% growth rate is staggering. Even if it falls to 15%, it will still be amazing.

Figure 5: Chinese e-commerce growth is at 20%. Source: Deloitte.

Also, Chinese e-commerce retail is largely above the global average of 7% and already at 13%.

Figure 6: Chinese e-commerce market share environment. Source: Deloitte.

Due to Chinese market segmentation, the largeness of the country, and the shopping attitude, this share is expected to grow in the future.

Important trends in the Chinese retail environment are the following:

#1: The sector is quickly shifting toward mobile, and businesses will go where the attention is.

Figure 7: Consumer attention is shifting to mobile. Source: Deloitte.

#2: Rural areas still provide huge room for growth.

Figure 8: Rural areas in China have low internet penetration. Source: Deloitte.

#3: The profile of the Chinese customer is changing and social media has made an impact.

Figure 9: The social impact of the Chinese customer. Source: McKinsey.

This is extremely important as it indicates a strong growth trend which will impact the global economy. The question is how to invest in it and whether you want to invest in something derived from someone on a social network.

#4: From a more global perspective, the Chinese market will continue to grow as the middle class is booming, but what’s also important is the boom in China’s affluent population.

Figure 10: Chinese market segment growth by 2022. Source: McKinsey.

Alongside economic development, there are mostly positives surrounding the Chinese retail market. This means that as long as there is systemic growth, a lot of negatives like declining margins, increased competition, and unprofitability can be forgiven and thus many investments will do well. However, when the strong positive trends shift, as it eventually will after saturation, run from Chinese e-retail investments as most stocks will bleed. There is likely plenty of time before the trend shifts, so let’s see what we have to look for to find good Chinese retail investments.



What To Look For 

When looking for a Chinese e-commerce investment, look for the following characteristics in a company:

  • Targets the middle and affluent classes.
  • Targets rural areas or is exposed to the growth there.
  • Has a strong presence on WeChat and other social media outlets.
  • Has a strong mobile presence.
  • Has a profitable business model that allows for growth.
  • Is a potential target for bigger players in the consolidation race.

Stay tuned for tomorrow’s issue as I’ll be digging deeper into the largest Chinese e-commerce companies to understand what the risks are and potential rewards from investing in such an environment. We’ll focus on fundamentals, earnings, earnings growth, and actual shareholder value creation.

© 2017 Investiv

By Sven Carlin China Investiv Daily Retail Share: