While China's economic growth has been slowing, the world's most populous country is still experiencing much stronger growth relative to more developed countries. China's gross domestic product, or GDP, reportedly grew 6.9% in 2015.
Waves of consumers from China's population of 1.4 billion continue to pour into the middle class, including the upper-middle class, which is largely considered the "consuming class" that's responsible for much of any country's economic growth. Two companies poised to significantly grow their empires thanks to this long-term trend are Walt Disney Co. (NYSE:DIS) and A.O. Smith (NYSE:AOS).
Shanghai Disney as a "gateway experience"
Disney opened its first theme park in mainland China -- the massive Shanghai Disney -- on June 17. CEO Bob Iger's characterized the grand opening as "spectacular," and by all accounts, the opening went off without a major hitch. The pent-up demand among Chinese consumers to experience the one-of-kind experience that only a Disney theme park can provide was evident early on. Opening-day tickets were snatched up within a few hours of their availability in March, and the on-site hotels were quickly fully booked for the first two weeks of the park's opening.
Shanghai Disney's early results have lived up to the pre-opening hype. Iger said on the company's fiscal Q3 analyst conference call that "well over 1 million" guests have visited the park and that the overall hotel occupancy rate was holding steady at 95%. Those numbers were as of Aug. 9, so we're talking about less than a two-month period. Moreover, Disney's research indicates that more than 70% of the people of Shanghai -- or nearly 17 million -- intend to visit the park. The attraction isn't only drawing visitors from the Shanghai area, but throughout China and internationally. Shanghai ranked No. 20 on Euromonitor's top international tourist destinations in 2014, drawing 6.4 million visitors from outside China.
Disney Shanghai should contribute nicely to Disney's future financial results in its parks and resorts business, which accounted for nearly 30% and 21%, respectively, of the company's revenue and segment operating income for the first nine months of fiscal 2016. Disney Shanghai, however, is much more than a magnificent park that is poised to be very successful. It should act as a gateway experience into the wonderful world of Disney, since it will be many Chinese consumers' first (or at least most intimate) experience with a Disney product or service. If these newbie Disneyites are delighted by their visits, they're not only likely to come back again, but to also be primed to devour other Disney offerings.
Bringing hot running water and cleaner water to China
A.O. Smith's primary business is manufacturing water heaters and boilers for the residential and commercial markets. It's the market share leader in the U.S. for both residential and commercial water heaters. The innovative Wisconsin-based company also has a small -- but growing -- consumer water-treatment business that it started in China but has expanded into the United States.
A.O. Smith had the foresight to enter the Chinese premium water heater market in 1995, making it an early foreign entrant into the world's most populous country. The company's investments in its China business have earned it a strong brand name and a rising market share. A.O. Smith's China business has grown at a 25% average annual rate over the past 10 years and currently accounts for about 30% of its total revenue.
In the second quarter, A.O. Smith's sales in China continued to power its revenue growth, rising 10%, or nearly 16% in local currency, whereas total revenue grew 3% in constant currency. Earnings per share jumped 24%, in part due to the company's pricing power. A.O. Smith expects 2016 EPS to grow between 13.3% and 15.2% year over year. This is great growth considering the company continues to invest heavily in its China business -- it's been expanding into tier 2 and tier 3 cities -- and is in the early stages of establishing a business in India, the world's second most populous country.
Wall Street analysts project that A.O. Smith will grow EPS at an average annual rate of 11.5% over the next five years. However, there's reason to believe that this estimate will prove too conservative. A.O. Smith continues to beat analysts' expectations, cruising by both first- and second-quarter estimates by about 9%.