China's policy changes amid broader demographic shifts present investment opportunities

MUCH talk has arisen from China's recent policy developments and demographic shifts. Most of it has focused on the impact that the country's so-called "tech crackdown" and pursuit of "common prosperity" has had on stock markets, with Chinese counters on global exchanges collectively taking a hit amounting to over US$1.5 trillion.

But underneath the headlines are motivations and trends that present attractive investment opportunities and growth prospects. These have long-term implications which investors should consider as they navigate the Chinese market.

Notably, a number of China's regulatory changes stem from the same goal - increasing the country's number of childbirths, which has fallen from 18 million in 2016 to 12 million in 2020. China needs more babies to provide the population base required to drive the country's next phase of economic growth, but its citizens have been staying single for longer and increasingly shunning parenthood amid rising financial and mental stress.

The recent "third child policy", education sector reform, as well as a string of seemingly unrelated auxiliary interventions targeted at easing the inflated prices of properties near school zones; long working hours and more, seek to alleviate pressure points.

Some sectors have undergone overnight changes as a direct result of recent policies, leaving certain players out in the cold while positioning others for upside. The banning of new K-12 tutoring businesses from opening, as well as requiring existing ones to convert into non-profit organisations and not pursue initial public offerings, for example, have dampened education businesses focused on academic subjects. This may reroute demand into comparable businesses that offer lessons in non-academic disciplines such as the arts or sports.

Maternity and children (M&C) businesses may also benefit from the recent policy developments. But picking winners requires insights into how different consumers behave, as well as what strategies and capabilities M&C businesses need to have in order to succeed in each consumer segment.

The post-90s mums segment, for instance, has growth prospects that may persist even with the status quo, and become more pronounced if childbirths increase. Such mums are highly sophisticated when evaluating products, and are more focused than others on their own well-being when pregnant and when raising children. There is therefore room for enhancing or emphasising the premium quality of certain products and services, as well as penetrating new categories within this space. That said, investors looking to this segment need to be sure that the players they back have the superior product development, storytelling, and brand-building capabilities required to win here.

KNOWING WHERE TO LOOK

Mothers in third- to fifth-tier cities, which are expected to account for more than 80 per cent of childbirths over the next few years, represent a more sizeable slice of the pie. However, distribution channels in these cities are very fragmented, with 78 per cent of M&C stores being single-store businesses and only 2 per cent belonging to chains with more than 10 stores. E-commerce is also less prevalent in these cities compared to higher-tier ones. Investors looking for exposure to this market therefore need to ensure that the players they back can penetrate a vast network of dispersed points of sale.

However, while recent policy developments may encourage more childbirths, they may not be enough to reverse the overall decline. Some experts suggest that the new measures will at best mitigate the decrease by 0.5 to 0.6 million babies per annum and that there will still be at least a 3 per cent year-on-year drop between 2021 and 2025.

Indeed, the increasing proclivity for extended singlehood and the ongoing ageing of the population may persist. These bode well for various sectors.

As urban adults stay single for longer, more are turning to pets for emotional companionship. This, in turn, generates greater demand for pet-related products. The pet food market in China, for instance, is forecast to expand from US$8 billion in 2020 to US$20 billion by 2025. And people are even "humanising" their pets - treating them like their children, giving them human-like products and experiences. Underpinned by such trends, this premium segment is poised to register the most growth, more than tripling from US$1.3 billion to US$4.2 billion over the same period, providing tailwinds for strong players in this space.

As the country's population gradually tilts towards seniors, the "silver hair economy" is expected to burgeon as well. Demand for more products and services in areas such as chronic disease management and elderly care will therefore rise, fuelling the growth of businesses with differentiated and compelling value propositions in these sectors.

Looking beyond demographic shifts, other broader themes and trends that shape consumer behaviour and drive purchasing decisions also present investment opportunities. For instance, there is a growing preference for "better-for-you" products, domestic brands, and experiential retail among consumers in China. These have wide-ranging implications for multiple sectors such as beauty and personal care, consumer packaged goods, fashion and apparel, food and beverage, as well as health and wellness, with strong players in specific categories set to benefit.

Opportunities indeed abound and the potential for superior risk-adjusted returns from China remains very tangible. Investors just need to know where to look. Deep insights into macro trends and consumers' psyche, as well as a rigorous understanding of the strategies and capabilities that businesses in each advantaged category need in order to succeed is key.

• The writers are co-managing partners (Asia) of L Catterton, the world's largest consumer-focused global private equity firm.