There has been heavy media coverage on the possibility of changes to the one child policy. Given China’s demographics and birth rate, its newborn population should peak in 2013. We cannot predict whether there will be any change to the policy; here we discuss the potential impact if changes occur. If the policy is relaxed, we would expect China’s birth rate to rise, with the peak birth period lasting 4-5 years, and a peak child-raising period of at least 9-10 years. We would expect a larger rise in newborns in cities and developed provinces, which have stronger buying power.
· Sensitivity analysis on an increase in the newborn population
If the one child policy is relaxed and leads to a 10% rise in the birth rate of second children, then China’s newborn population may increase c3%. And if the birth rate of second children rises by 20%, China’s newborn population may increase 6%+.
· Demand for infant/child goods (milk, diapers, toys) to grow substantially
We are most positive on milk powder as the largest beneficiary of a rising infant/ children population, and the sector’s situation is improving. Our top picks are Yili and Beingmate. We also like toys; listed makers rely on exports, and higher earnings will not be evident near term, but long term, companies with strong R&D and popular brands may transform and benefit. We favour Xinghui Auto Model.
· Change in family structure may spur demand for home & auto upgrades
More families would shift from 3- to 4-member households, lifting demand for home and vehicle upgrades. Thanks to their roomy comfort, MPVs may have growth potential in the family-use market; we like JAC here. Binjiang Real Estate’s homes are medium/large-sized; it may benefit from larger families, though its business is very dependent on the Hangzhou market, limiting its long-term outlook.
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