Chinese brands are gaining popularity at home. Here are 3 stocks to watch

Published Mon, Jan 25 20213:13 AM EST

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Key Points

Locals often choose foreign brands for better quality and design, even if it means paying a higher price or facing difficulties buying the products in China.
But there's been increased interest in domestic brands in the last few years, as local own brands have been able to improve their own production quality, analysts say.
"The entire infrastructure for brands has undergone a big change, and everyone will sense that now there are more and more new brands emerging," said Tracy Ji, founding managing partner of Chinese investment firm Meridian Capital.

BEIJING — Social media and e-commerce have shaken up the retail industry and raised the stakes for companies trying to sell to the increasingly price-conscious Chinese consumer. Locals often choose foreign brands for better quality and design, even if it means paying a higher price or facing difficulties buying the products in China. In the last few years, however, China's own businesses have been able to improve their own production quality — often for a lower price, analysts said. Social media and livestreaming have also transformed how brands interact with shoppers. "The entire infrastructure for brands has undergone a big change, and everyone will sense that there are now more and more new brands emerging (in China)," said Tracy Ji, founding managing partner of Chinese investment firm Meridian Capital, according to a CNBC translation of her Mandarin-language remarks. "There is indeed an opportunity from this structural change, which is also why we put particular emphasis on the opportunities for new domestic brands to emerge," she said. Adding to the competition are the rapid rise of e-commerce that's cut costs and bypassed traditional distribution channels, as well as the coronavirus pandemic that's kept millions of Chinese shoppers from traveling abroad. "Chinese consumers — their preferences are changing really fast," said Kelly Tang, a senior analyst at Euromonitor who focuses on skincare and cosmetics. "Successful brands, they catch those trends from the very beginning." Here are some Chinese consumer stocks to watch: Bosideng Once viewed as an old-fashioned manufacturer of down coats from the 1970s, Shanghai-based Bosideng has begun to pitch itself as an international brand — beginning in earnest by appearing at New York Fashion Week in 2018, and London's in 2020. Now, Bosideng says about one-fifth of its consumers are under the age of 30. Its Hong Kong-listed shares soared to a record high of 4.55 Hong Kong dollar earlier this month. A few days earlier, the Chinese coat maker had announced that sales of the core Bosideng brand rose more than 25% from April to December, compared with a year ago. That's despite the economic shock of the coronavirus pandemic. Shares have since pulled back from that high, but remain up more than 3.5% over the last three months, according to financial data accessed through Wind Information.. The gains contrast with a more than 4% drop in the same period for New York-listed Canada Goose , a manufacturer of high-end parkas whose popularity in China has sparked the sales of many counterfeits. The Canadian company opened its first physical store in mainland China in late 2018. Canada Goose said in November that sales in mainland China have returned to growth. Sales of coats sold through direct channels, such as e-commerce, were up more than 30% in the three months ending Sept. 27. Asia sales overall fell 16% from a year ago. Perfect Diary Rather than testing the market with a physical store, Guangzhou-based makeup brand Perfect Diary went straight to its target of young consumers, and launched an online store in 2017. Perfect Dairy also hit the market with lower-priced products tied to marketing campaigns that featured popular Chinese singers. The makeup brand also partnered with institutions such as National Geographic and London's British Museum. When Perfect Diary's parent company Yatsen went public on the New York Stock Exchange in November, the makeup brand was already ranked third in the Chinese cosmetics market, according to Reuters. Yatsen's shares are up more than 80% since the listing. Such "fashionable, local skincare, cosmetics brands are rising in the context of the growing national identity consciousness (of) Chinese consumers," said Jason Yu, managing director for Kantar Worldpanel in Greater China, a market research firm. He said Chinese consumers are growing more sensitive to price, and will buy a cheaper product if it works just about as well. "All the brands realize the importance of being localized ... how to market to Chinese consumers in a locally relevant way, and (to have) production innovation (at) Chinese speed," he said. Yu said Chinese brands managed to post modest growth in the local cosmetics market last year amid the pandemic, while foreign brands — primarily Japanese and South Korean ones — saw a drop. Li Ning Founded in 1990 by gold medal gymnast Li Ning , the Chinese company has revamped itself in the last few years as a trendy sportswear and sneaker brand. Sales of domestic brands such as Li Ning and Huili have doubled in the last month, with a growth rate far exceeding that of popular European and American shoe brands, said Jay Xiao, CEO of LexinFintech , in a statement earlier in January. LexinFintech runs installment purchase online shopping site Fenqile. Xiao attributed the increased interest in domestic brands to significant improvements in design and quality at lower prices. He noted, however, that by absolute amount of sales, major international brands still lead in many categories. Li Ning's shoe sales held steady despite the coronavirus pandemic, eking out a 0.1% increase to 2.92 billion yuan in the first half of 2020 . Footwear accounts for about half of Li Ning's revenue. Apparel, which accounts for roughly the other half, saw its sales contract by about 4%. Equipment and accessories' sales rose 15.2% to 314.8 million yuan. Shares have climbed about 25% to 51.10 Hong Kong dollars over the last three months, compared with a nearly 9% gain for Nike in the same period, according to Wind Information data. On Jan. 4, Jefferies equity analyst John Chou and his team raised their price target for Li Ning to 60.60 Hong Kong dollars a share from 43.50 Hong Kong dollars. "We believe Li Ning's equity story is about pioneering: We believe the company is trying to build a unique brand focusing on Chinese sportswear elements to center on Chinese consumers," the analysts said.

A Perfect Diary store in Shanghai, China in Nov. 1, 2020.

VCG | Visual China Group | Getty Images

BEIJING — Social media and e-commerce have shaken up the retail industry and raised the stakes for companies trying to sell to the increasingly price-conscious Chinese consumer.

Locals often choose foreign brands for better quality and design, even if it means paying a higher price or facing difficulties buying the products in China.

In the last few years, however, China's own businesses have been able to improve their own production quality — often for a lower price, analysts said.

Social media and livestreaming have also transformed how brands interact with shoppers.

"The entire infrastructure for brands has undergone a big change, and everyone will sense that there are now more and more new brands emerging (in China)," said Tracy Ji, founding managing partner of Chinese investment firm Meridian Capital, according to a CNBC translation of her Mandarin-language remarks.