Reading China’s contradictory tea leaves

In this issue:

• LVMH and Sasseur Reit give us a glimpse of the Chinese consumer
• UOL’s valuation gap and what it can do about it

Good morning, BT readers.

Big Money is back after a brief hiatus, with a new face (mine) being thrust into your inbox every Monday morning. My face might be new to most readers, but it previously spent more than a decade glowering at Mr Market and newsmakers when I covered financial news for The Business Times.

While much has changed since I first started in the business, this immortal line from Coolio’s Gangsta’s Paradise remains true for many of us – in that we’re educated fools with money on our minds. The market takes random walks and we’re at the mercy of mercurial macro forces – but we will keep chasing those sweet, sweet alpha returns regardless.

We are cursed to live in interesting times, but as we navigate the markets, may we become better-educated fools and may the money on our minds become money in our pockets.

Speaking of pockets, a tale of two kinds of Chinese consumers emerged last week, as updates from LVMH and Sasseur Reit gave us a glimpse of what to expect beyond the Great Wall.

What’s happening?

Luxury goods heavyweight LVMH ended its post-pandemic growth streak last week by posting a 3 per cent dip in Q3 organic sales and missing the street’s expectations. It was Chinese customers that let the side down, with sales in Asia (excluding Japan) – where China dominates – plummeting 16 per cent. 

“Consumer confidence in mainland China today is back in line with the all-time low reached during Covid,” LVMH’s chief financial officer Jean-Jacques Guiony said. 

Post-earnings release, LVMH’s share price dropped as much as 7.5 per cent to a two-year low last week. 

But like calories, consumers are not created equal. Sasseur Reit, an outlet mall trust, saw a far better spending lollapalooza during Golden Week, posting record-breaking sales. During the period that spanned the first week of October, sales across its outlets were up nearly 28 per cent year on year and up 55 per cent from pre-pandemic levels. The Reit attributed this to synchronising its outlet anniversary celebrations, which started in September and were then followed by Golden Week promotions.

Why it matters

The contrasting LVMH and Sasseur Reit scenarios tell us that Chinese consumers’ purses are bulging, but it will take some convincing for them to loosen the purse strings. They might be doing it more readily for discounted items at outlet stores than for full-price handbags at Louis Vuitton – but they’re doing it, regardless. 

Also, mere news about good news is enough to move the needle. While none of the Chinese government’s proposed measures have worked their way through the system yet, even the anticipation of stimulus might set off a self-fulfilling cycle. 

While 2024’s Golden Week spending in October still has not recovered to pre-pandemic levels, its daily spend was almost 16 per cent higher than during China’s Labour Day holidays earlier this year. This suggests that consumer sentiment has improved in the intervening five months, even as US-China trade tensions have ratcheted upwards.

Investors are itching to deploy money into the Chinese market, especially as the US stands on the brink of a possible recession, and there are ample investment ideas being proffered. 

Analysts from CGS International, for example, have highlighted 25 potential Singapore companies that could benefit from a turnaround in China. Among them are Wilmar International, which gets almost half its revenue from China, as well as CapitaLand Investment and Mapletree Logistics Trust, which have significant exposure to China. 

This is a rare case in which picking stocks is the easy part, and the question of timing is the more vexing one. Reports abound that the Chinese government may raise an additional six trillion yuan (S$1.1 trillion) in debt over the next three years, which will go towards sorely needed fiscal stimulus. This seems like a great deal of stimulus until you consider that overall public debt is estimated at US$16 trillion, making the additional funds more of a handheld revolver than the awaited bazooka. 

The recent burst of Golden Week spending is akin to the recent run-up in Chinese stocks: a lack of dry powder isn’t the issue here; the lack of a bazooka is. This is China’s economic recovery to lose. 

The big number: 59%

This is UOL Group’s staggering market discount to end-June’s net asset value (NAV), which BT’s senior correspondent Leslie Yee highlighted last week. Despite the property developer’s savvy investments and solid execution, the gulf between its stock price and NAV per share is as wide as the Mariana Trench is deep. 

“The NAV does not capture potential profit from housing development projects or the upside from marking to market the value of hotel properties carried under property, plant and equipment,” Yee pointed out in his column last week. 

To remedy this, he suggests that UOL explore capital-efficient ways of holding its assets, such as through listed or unlisted property funds. The group could also free up capital by reducing its ownership stake in assets while boosting its return on equity by earning fund management fee income.

UOL, I hope you’re taking notes. 

The property developer’s plight exists alongside a wider malady. Poor valuations continue to plague Singapore listcos, alongside lower liquidity and an anaemic initial public offering (IPO) scene. Some market watchers reckon that Singapore could take a few leaves from Bursa Malaysia’s book to combat this. This includes making the IPO process more flexible from a regulatory standpoint and making retail investor participation more compelling. 

SGX and MAS, you can take notes, too. 

(Disclosure: I own shares in LVMH, Sasseur Reit, CapitaLand Investment and Mapletree Logistics Trust.)

5 big reads

• China’s economic ills are serious but not incurable Unfortunately, policymakers have made things worse by resorting to temporary palliatives.
• Why the American stock market reigns supreme Lower returns are coming, but they should continue to be world-beating.
• S-Reits earnings, DPU likely to decline in Q3 despite interest rate cut Analysts say that the sector’s DPUs are likely to “stay flat” or even contract, given that most S-Reits have their debts pegged to fixed interest rates.
• Sabana Reit better off if major unitholders not represented on board of new internal manager Would-be directors should commit to purchasing S$1 million worth of units in the market to align interest with unitholders.
• VW, BMW and Mercedes are getting left in the dust by China’s EVs After falling behind on tech trends, German carmakers are scrambling to recover in their biggest and most lucrative market.