PDD just gave markets the latest warning on China’s consumer. Where investors are looking instead
PDD ‘s tumble of nearly 30% last week on disappointing quarterly results is a reminder that China’s consumer has largely moved on from its years of double-digit growth. The slowdown shows few signs of turning around soon. That doesn’t mean it’s a sell across the board. PDD’s revenue grew by nearly 90% from a year ago, while profit more than doubled, pointed out Charlie Chen, managing director, head of Asia research, at China Renaissance Securities. “The reaction of its stock price is out of touch with its fundamentals,” he said in Mandarin, translated by CNBC. “The entire Chinese consumer market is weak, yes, [but] PDD management’s very peculiar comments caused the share price decline,” he said. Chen Lei, chairman and co-CEO of PDD, warned multiple times on the earnings call about future declines in profit. But analysts point out that despite price target cuts, the stock remains attractively valued . Other earnings have painted a less-dire picture. Chinese food delivery company Meituan on Wednesday reported second-quarter revenue and earnings that significantly beat FactSet expectations. Revenue grew by 21%, while adjusted earnings nearly doubled from a year ago. Morgan Stanley upgraded the Hong Kong-listed stock to overweight from equal-weight, while JPMorgan raised its price target to 140 Hong Kong dollars ($17.95) with an overweight rating, according to FactSet. That’s 18% upside from where Meituan shares closed Friday, up by nearly 10% for the week. The delivery company, which also owns China’s version of Yelp, said its in-store, hotel and travel business maintained “strong growth.” Management did not comment much on consumer sentiment, beyond a clear preference on value-for-money. “Under the current macro environment, demand for low-star hotels has increased,” CEO Wang Xing said on an earnings call, according to a FactSet transcript. Chinese booking site Trip.com , listed in the U.S. and Hong Kong, on Aug. 26 reported a mild beat on the top and bottom line, according to FactSet. Trip.com said reservations for travel out of China recovered to 100% of the pre-Covid level in the second quarter of 2019. That’s despite international flight capacity that’s only 75% of pre-pandemic levels, the company said. Trip.com’s Hong Kong-traded shares rose by nearly 12% last week. “I think people also now are switching a little bit more into experience consumption than goods consumption, because goods, you can only have that much,” said Liqian Ren, leader of quantitative investment at WisdomTree. She pointed out that there’s more pent-up demand for travel, and expects it to persist for another year or so, since people could buy goods via e-commerce platforms during the pandemic. However, Ren pointed out the real estate slump and general uncertainty about income is constraining consumer spending. Retail sales grew by 2.7% in July from a year ago, after a 2% increase in June. Ren said an effective way for China to support the economy could be to take proactive, rather than reactive, measures: removing all restrictions on house purchases and allowing all people living in cities access to the same benefits. People who just move to a city to work can’t necessarily enroll their children in the local schools without obtaining what’s called a “hukou.” Many cities, including Beijing, still restrict the number of properties people can buy. “As long as the Chinese government realizes it has a number of tools to get ahead of the market, then it will stop this slow grinding of people not wanting to spend,” Ren said. Other companies, such as Yum China , are using new business strategies to grow profit despite slower consumer spending. In early August, the operator of KFC and Pizza Hut in China reported second-quarter earnings grew 19% to 55 cents a share, beating the FactSet estimate of 47 cents. About 80% of those Pizza Hut stores have automatic fried machines, and 50% have robotic servers, according to CEO Joey Wat, noting overall automation of tasks from labor scheduling to inventory management. U.S.-traded shares of Yum China were up more than 1% last week. In the meantime, the tepid environment has generally supported a more conservative tilt by investors. Banks are one of the few sectors in Hong Kong’s Hang Seng index that is up double-digits so far this year, according to Wind Information. Hong Kong-listed Postal Savings Bank of China is Morgan Stanley’s new top pick in the sector, analyst Richard Xu and a team said in a mid-August report. “We think the shifting monetary policy framework, moderating loan growth window guidance, and PBOC support for long-term bond yields will create a favorable environment for bank [net interest margin] to stabilize and rebound,” the report said. “Among all the banks, we think PSBC is one of the best positioned to leverage this trend.” Morgan Stanley is expects Chinese bank stocks could see their fourth-straight year of outperformance this year. “We think the inventory on the property market will go down to a more reasonable level by mid-2025. That means, the drag will be a lot less on a low economy from the property market correction or slowdown,” Xu said in an interview. He is also watching whether pressure to expand industrial capacity eases, helping business profit margins. “If those factors started to moderate over time, then some other sectors could perform better than the banks.”
