The opportunity for investors in China isn't likely to end anytime soon. In fact, it may be getting even bigger.
Recently, several prominent CEOs have been extremely enthusiastic about their companies' prospects in that market. Apple (Nasdaq: AAPL) CEO Tim Cook declared just last week that there was a lot of headroom remaining in China. Starbucks (Nasdaq: SBUX) CEO Howard Schultz said he hadn't seen growth in a market like this since his company's torrid expansion in the U.S. during the 1990s. David Novak, the CEO of Yum! Brands (NYSE: YUM), called China the "biggest retail opportunity in the 21st century."
Jim O'Neill, the astute observer of China who coined the term BRIC, points to evidence that consumption is already beginning to make up an increasing share of Chinese GDP. If this trend were to continue, investors could benefit tremendously. After considering Apple's recent performance in China, O'Neill wrote about "the remarkable opportunity afforded by the Chinese consumer, and suggested many others could benefit dramatically too."
Mind-boggling numbers
The numbers from the most recent quarter are truly remarkable. Apple reported that iPhone sales were up fivefold on mainland China from a year ago. And overall revenue for greater China, which includes Hong Kong and Taiwan, tripled. Cook called the results "mind-boggling." O'Neill, when asked about Apple's quarter, said that he was "blown away by their staggering sales to China."
Starbucks saw similar results, and reported that China delivered its seventh consecutive quarter of comparable store sales growth exceeding 20%. Schultz was so impressed with consumer demand in China that he decided to accelerate store opening targets there for the remainder of 2012.
The rise of the Chinese consumer
A recent piece in the Wall Street Journal noted the surging sales of consumer-focused companies like Apple and Starbucks. It also reported that Caterpillar (NYSE: CAT), ABB (NYSE: ABB), and other big equipment makers, saw slowing demand. According to the Wall Street Journal, this could be "an early sign of big change in Chinese economic growth that emphasizes consumer spending."
Jim O'Neill has been one of the first commentators to notice this trend. Commenting on China's first quarter data, he reported that private consumption is now 39% of GDP, which is up 4 percentage points over the past couple of years. As China gradually shifts from being export-focused to more consumption-driven, this could possibly mean rapidly increasing sales for big American consumer brands. O'Neill feels that Apple's fantastic results are a sign of what is to come.
Playing the trend
In an earlier piece, I wrote about how Starbucks might be a very attractive way to play China's tremendous growth. Starbucks has an experienced leadership team that is dedicated to smart expansion in the country. It's also well-positioned to benefit from increasing urbanization and higher incomes. After listening to Starbucks' recent conference call, I'm even more bullish on the company's prospects in China.
Howard Schultz started the call by noting that he usually doesn't begin by talking about a particular market, but that he was making an exception in the case of China. He was enthusiastic about the momentum he is seeing in that country, and was very encouraged by the high level of adoption by the Chinese consumer. He was also pleased to report that Starbucks is well on its way to having 1,500 stores in the country by 2015.
The raw numbers seem to back up Schultz's enthusiasm. In the second quarter, revenues from the China/Asia-Pacific region increased 32% to $174.6 million. And operating income increased a staggering 59% to $69.5 million in the region, while its operating margin improved 660 basis points to 39.8%.
Perhaps the most exciting thing of all about the quarter is that Chinese expansion is still in its early stages. If O'Neill is correct about the emerging trend toward greater consumption rates in that country, then Starbucks will continue to experience remarkable growth there. And its investors should benefit handsomely as a result.
There are actually quite a few American companies doing business in China that also stand to profit from this emerging trend. Our analysts have taken a closer look at three of them in our special report: "3 American Companies Set to Dominate the World." To learn more about these promising opportunities, grab a copy of the free report now.
