What China's resilient big spenders are buying and the stocks that benefit

Published Sun, Jul 16 20236:50 PM EDT

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

Imagine a consumer base roughly the size of the adult U.S. population. That's approximately how large China's "premium" consumer population is – and it's a "huge" opportunity for higher-end sportswear by foreign companies, according to Bernstein. "Given their outsized earnings power, Premium segments are much more immune to short-term headwinds of unemployment and macro concerns that are impacting mainstream and lower-end consumers," analyst Aneesha Sherman and a team wrote in a report Tuesday. By U.S. standards, it doesn't take much to be considered premium in China. Bernstein's analysis covers two categories: a top group of 93 million consumers earning an average of $95,000 in gross annual income, and another 170 million consumers earning an average of $26,000. That's a total of 263 million people. The market segment is about one-fifth of China's 1.4 billion people – and its size is expected to grow multiples faster than that of the mainstream, the report said. About 258 million people in the U.S. are age 18 and over , according to the U.S. Census Bureau. Income and cost of living varies widely in China. But many people still earn relatively little. In the first quarter, the official median disposable income of people living in cities was the equivalent of $1,739 . The mid-tier consumer population is expected to grow more slowly, the Bernstein report said. For international companies in the segment, the analysts pointed out there's intense competition from up-and-coming Chinese brands. The plays Two of the leading domestic players, Li Ning and Anta Sports , are listed in Hong Kong. Li Ning said its revenue, mostly from footwear and apparel, grew by 14.3% in 2022 to 25.8 billion yuan ($3.61 billion) – despite the pandemic. Similarly, Anta Sports said its Anta brand sales grew by 15.5% in 2022 to 27.72 billion yuan. Anta on Wednesday also announced Kyrie Irving will become the company's basketball line's chief creative officer – with plans to reveal branded shoes in the first quarter of 2024. Miao Kun, a 30-year-old who works in sports media in Beijing, said that since the end of the pandemic, more people in China are interested in going out to play sports. He agreed that in China, the sportswear brands bear similarities to local impressions of car brand rankings. Adidas and Nike are like Benz, BMW, the highest end, he said, while the other brands are like Audi or Toyota. That creates distinct market segments – by price. For Nike and Adidas, even their lowest price is two times that of local competitors, the Bernstein analysts said. They noted a pair of Nike sneakers can start at the equivalent of $50 in China, while one from Anta costs just $25. "The China Premium growth potential is a key factor in our Outperform ratings of Nike and Adidas, both of which have close to 20% exposure to China," the report said. The analysts have a $134 price target on Nike, for upside of more than 20% from Thursday's close. They expect Adidas' U.S.-traded shares can rise nearly 15% from Thursday's close to $112.32 each. Bernstein has a price target of 190 euros for Adidas' shares in Germany. And Hoka – the Deckers -owned premium shoe brand which did $1.4 billion in net sales for the 12 months ended in March – is eyeing a China expansion strategy with a few physical retail stores in big cities and an e-commerce presence. Management said on an earnings call in May that Hoka is "seeing solid success" in China and acknowledged the company could "accelerate faster." However, focusing only on the premium growth segment can overlook the fact that many of China's consumers still live in smaller cities. Those less developed regions, outside the large cities of Shanghai or Chengdu, account for about 1.2 billion people and 17 trillion yuan of consumer spending. That's according to data shared by a local entrepreneur and cited by by Beijing-based BigOne Lab , an alternative data company whose backers include S & P Global. That less developed market is where e-commerce site Pinduoduo and the latest upstart chain Cotti Coffee are playing, in addition to China's big cities, BigOne's analysis pointed out. — CNBC's Michael Bloom contributed to this report.