Top Stories
Top Stories
Business News

Analysts are raving about this one industry in China that has no overcapacity problem

Jennifer Li
Attendants place biodegradable urns in their r
Frederic J. Brown | AFP | Getty Images

China's death care market is to see robust growth in the coming five years, driven by the needs of an ageing society.

The number of people in China aged 60 or above is roughly 222 million, the largest elderly group of any nation. These seniors accounted for 16.1 per cent of the mainland population, according to China's Ministry of Civil Affairs. By 2050, that figure is expected to surpass 300 million, according to mainland brokerage house Essence International.

About 47.1 per cent of funerals involved cremation in China in 2015.

Faced with increasingly scarce land and soaring property prices, Chinese authorities have been striving to bolster the popularity of cremation, something which could prove a challenge in a nation where the cultural norm is to bury the deceased. China's Ministry of Civil Affairs announced policies two years ago to push up the cremation rate to 100 per cent by 2020.

The market of traditional death care is forecast to grow 35 per cent annually, from 110.8 billion yuan last year to 505.4 billion yuan in 2020, China Merchants Securities analyst Dong Ruibin wrote in a report. In addition, death services, which includes eco-friendly burial methods as well as some traditional services, will surpass 200 billion yuan by 2020.

On a related note, innovative and eco-friendly burial methods are becoming popular in the world's second largest economy, especially in first and second tier cities.

Elderly Chinese men and women take part in morning exercises in Beijing, China.
Kevin Frayer | Getty Images

Sea burial, tree burial and flower burial s are being promoted in Beijing, Shanghai and other cities, according to China Merchants Securities.

Tree burial entails burying the ashes of the deceased underground, while flower burial entails disseminating ashes in flower beds.

In Beijing, there were 1,700 cases of sea burials in 2014.

The Chinese government encourages such methods which saves space that would otherwise be needed for graveyards and columbariums.

In a modern twist, the Ministry of Civil Affairs in February promoted the use of QR-code gravestones and other eco-friendly methods in place of traditional grave plots.

More from the South China Morning Post :
China continues its love affair with credit
Cement prices to rally thanks to booming property market
Majorityof PSBC's investors are cornerstones, a concerning trend for IPOs,say experts

They also unveiled subsidies to promote the dissemination of ashes through burials at sea and land.

Demand for funerals has been growing strongly, along with services such as video and other services.

"Filiality tops among all the good moral character in a country that was largely impacted by Confucius thought," China Merchants Securities said. "The custom of elaborate burial has never changed."

China Merchants Securities expects the market for emerging death services, including eco-friendly burial methods and high-end funeral services to exceed 200 billion yuan by 2020.

Average gross profit margin in the industry is as high as 80 per cent and net profit margin is around 50 per cent, according to analysts from Soochow Securities.

Fu Shou Yuan International Group, China's largest death-care service provider listed in Hong Kong, had a gross profit margin of 78.9 per cent for the six months ended June 30, according to a Hong Kong stock market filing.

Fu Shou Yuan's shares have slumped 59 per cent so far this year, closing at HK$4.44 on Tuesday.

First Shanghai Securities gave a buy rating with a target price of HK$6.60, noting that the company's revenue in the second half will likely rise at least 15 per cent on year. JP Morgan and Citi both also have buy ratings on the company.

Chinese funeral workers prepare urns for burial at the Shimenfeng memorial park during a ceremony in conjunction with the Qingming festival in Wuhan, China's Hubei province.
STR | AFP | Getty Images

Fortune Ng Fung Food Hebei, which operates pork farms and provides death care services, said its gross margin for the death care segment was 85.2 per cent during the first half, according to a Shanghai stock market filing.

"This is a sunrise industry, prices for grave plots at Fortune Ng Fung Food jumped over 30 per cent from a year back," Soochow Securities' analysts said.

Fortune's graveyard is located in Yanjiao town of Hebei province, which is close to Beijing and Tianjin.

Dong said the high margin is related to non-transparent pricing in the industry.

For the most part, families have limited time to arrange death services, which means they won't shop around. Moreover, cultural taboos can mean that it's not easy to attract new workers into the industry, which means that higher wages in the sector also get passed along to consumers.

For new players who want to join the burgeoning market, ascertaining a license from local governments can prove difficult.

"There is a high entry barrier for operating graveyards because local governments only allow one to two licenses in a region," Soochow Securities said.

Additional merger and acquisition activity is expected in the sector as major operators seek to expand their market share, analysts said.

Follow CNBC International on Twitter and Facebook.