Australian business in China is booming – and ASX small caps could benefit
Two-thirds of Australian companies doing business in China are ready to increase their investment, according to a new report from big four accounting firm KPMG.
The paper surveyed 165 Australian companies with operations in China and found that, overall, optimism about the future was high, despite those pesky, ongoing concerns about the relationship between China and the United States.
Let’s not forget the baby bottle crew — in the past year, the ASX’s small cap infant formula stocks are up, on average, about 140 per cent.
The bad news? Of the 51 ASX small caps we’ve identified with some exposure to China, 34 have lost value over the past six months, and just 14 made gains.
However earlier this year, Stockhead reported that spending in China’s small cities would triple to $6.9 trillion.
So the Doing Business in China report should excite investors and motivate businesses. Here’s a few of the key takeaways, as well as some ASX small caps that could benefit.
Enthusiasm is booming
China is a lucrative channel for Australian companies, and KPMG says enthusiasm levels are increasing.
Two-thirds of companies plan to increase their investments in China, while 60 per cent are expecting to increase their headcount in the near term. More than 80 per cent of companies believe that profitability outlook for the next two years looks strong.
One company already benefitting is Clover Corp (ASX:CLV), which makes oils and powders that can be added to foods, including milk powder. It boosted its full-year profit from $3.6 million in 2017 to $7.6m last fiscal year, as well as boosting revenue by 32 per cent to $63 million, attributing the improved financials to Chinese demand.
China is also home to the vast majority of the global market for electric scooters. When electric two-wheeler maker Vmoto (ASX:VMT) reported its full-year results back in August, its revenue was up 11pc to $8.7m and profit rose 36pc to $1.4m.
The latest edition of the International Energy Agency‘s Global Electric Vehicle Outlook estimated that 2017 sales of electric two-wheelers reached 30 million, taking stock levels to 250 million.
The bulk of those — more than 99 per cent — come from China.
Vmoto also leased its Nanjing facility to Super Soco for rent of about $160,000 a year.
Growth of the middle class
Australian companies identified key growth opportunities in China as the rise of the middle class, sustained economic growth and the Belt and Road Initiative, which is a Chinese economic and strategic agenda to more closely tie the two ends of Eurasia, as well as Africa and Oceania, along two routes – one overland and one maritime.
The rise of the middle class has been a common response. Earlier this year, Dawine acquired Wine Depot.
Dean Taylor, chief of Dawine, said the acquisition will give Australian wine producers an “end-to-end solution” that allows them to make their products available to a wide variety of Chinese sales channels without having to develop relationships directly.
“Our integrated B2B trading and logistics platform will also make it a lot easier for Australian wineries and retailers to sell directly to consumers in that market. The Chinese middle class is rapidly expanding and they aspire to Western values including food and wine.”
Agtech Roots Sustainable (ASX:ROO) says a growing middle class demand for more protein-rich diets was part of the reason behind a it signing a $24 million Chinese distribution deal.
About half of the companies surveyed agreed they had witnessed an increase in attention or engagement by Chinese authorities, KPMG said.
That lines up with a take from director of research at PAC Partners, Paul Jensz, who told Stockhead that greater regulatory stability in China a couple of months ago was a major reason for strong improvement in the infant formula sector.
“We had a situation where it was in flux a lot of last year, and the Chinese authorities, quite rightly, tried to bring down the number of brands and provide differentiation between the thousands of products,” he said at time.
“It was very confusing for the authorities and for customers. Since then they have brought in rules to better regulate it — both for products that are internally generated and also the imported products.
“That stability in the last 12 months has allowed Australian listed companies to plan ahead and seek partnerships and distribution in China.”
There are a number of small cap ASX stocks which are experiencing big growth thanks in part to their exposure to business in China.
Murray Cod Australia (ASX:MCA), which sells high-quality, pond-grown Murray Cod, is up a whopping 228 per cent in the past six months, hitting 20c in Friday trade.
Just this week Food Revolution Group (ASX:FOD) announced a big China-related deal, and it’s no surprise its shares have risen considerably in recent times, some 213 per cent in the past six months, to 15c.
Below is a table of China-focused exporters and share price movement. Click headings to sort: