August 3, 2009
China Strategy
Jewels in the Crown: Our
Basket of China’s Consumer
Franchise Winners
Investment conclusion: Focusing on the likely
franchise winners is the best way to profit from the boom
in China’s domestic demand over the long term, we
believe. Morgan Stanley analysts have nominated 19
leading franchises for inclusion in a China consumer
franchise basket.
A key value driver: A franchise, although not a promise
of earnings in the near term, is a crucial long-term value
driver for companies pitching to a large customer base.
A franchise is even more important for a company’s
growth in continental economies such as the US and
China, given extensive geographical coverage and
cultural and economic differences across the country.
Franchises bolster margins or turnover: Experience
in developed markets such as the US shows that a
successful franchise can deliver consistently superior
margins or asset turnover versus competitors. Based on
our study of 43 US stocks with strong brands, we expect
the stock market to reward successful franchises
generously in the long term, although short-term
outperformance by these stocks is not obvious.
China is ready for franchise investment: China has
surpassed Japan to become the second-largest
consumer market globally after the US in nominal dollar
terms. After adjusting for purchasing power parity (PPP),
China’s annual retail sales equal roughly 80% of those in
the US. The development of China’s market economy
has reached the stage for franchise investment.
Our franchise basket: We have selected leading
franchises in the consumer discretionary, consumer
staples, information technology (IT), financials, and
health care sectors that we expect to grow by more than
100% in the next five to seven years.