Raising a kid is getting expensive in China — buy these global stocks to cash in, Jefferies says

Published Sun, Apr 10 202210:06 PM EDT

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

China's efforts to raise the national birth rate can help some U.S. consumer stocks, Jefferies analysts said in a report this month. While China's population rapidly ages, the analysts expect two developments to slow the trend and encourage more people to have children. One is that since high cost has discouraged childbirths, the government will implement new tax breaks and cash handouts. The cost of raising a child in China is the highest in the world on the basis of percent of average disposable income, the report said. The other is that fertility rates will likely rise as the impact of Covid fades. The analysts said the Spanish flu from 1918 to 1920 caused fertility rates to fall and hit a low point roughly half a year after the pandemic's peak. "Government efforts to hold back the COVID-accelerated demographic theme of declining births puts consumer and education stocks into the spotlight," the analysts said. "We believe premiumization will help maintain or expand margins for many of the consumer stocks." Here are some of Jefferies' stock picks to play the trend: Kimberly-Clark U.S.-based Kimberly-Clark owns Huggies diapers and Kleenex tissues, among other daily necessities. The company's baby business in China remains a key growth engine for the company, the Jefferies report said. "We estimate its baby business in China comprises toward higher-end of low single digit percentage of the company's global sales." Kimberly-Clark noted in its 2021 annual report that declining birth rates in key markets like China have pressured growth. "To help mitigate the effects of birth rate declines, we aim to drive sales growth at or ahead of category growth rates through innovation, premiumization, strong brand building plans and digital marketing investment as part of our Elevate and Expand growth strategy," the company said. First quarter earnings are due out April 22. Procter & Gamble China and the U.S. are Procter & Gamble 's two largest and most profitable markets, the company said in its report for the 2021 fiscal year, noting that organic sales rose by 8% in the U.S. and 12% in Greater China. Greater China accounted for 10% of net sales by region, the company said. "Within its China business, we estimate the baby business comprises about 15% of sales in the region, or low single digit percentage of PG's global sales," the Jefferies report said. Procter & Gamble owns baby product brands such as Luvs and Pampers. The company is next due to release quarterly results on April 23. Health and Happiness International Hong Kong-listed H & H Group sells nutrition products for babies, adults and pets. The company has a 45% exposure to infant formula and 4% to other pediatric products, the Jefferies report said. "China's declining birth rate has resulted in a smaller overall market and demand for baby nutrition and care products compared to previous years," CEO Laetitia Garnier said in a March 22 earnings release. "To mitigate this, we have proactively expanded our distribution of [infant milk products] products into lower-tier cities, and focused on categories such as super-premium cow IMF and goat milk IMF," she said. In 2021, H & H reported declines of 10.8% on a like-for-like basis in the mainland China baby nutrition and care segment. Overall revenue rose by 3.2% to 11.55 billion yuan ($1.8 billion). — CNBC's Michael Bloom contributed to this report.

If increasingly frugal Chinese consumers plan to spend, the top category is education, a PBOC survey found in the first quarter of 2022.

Huang Jinkun | Visual China Group | Getty Images

China's efforts to raise the national birth rate can help some U.S. consumer stocks, Jefferies analysts said in a report this month.