2 Consumer Stocks to Avoid as Covid-19 Wave Hits China
April 18, 2022
For Singapore investors in Chinese stocks, there are reasons to worry. Of immediate concern is the fact that China is being hit with a spike in Covid-19 infections as major cities, such as Shanghai, go into sustained lockdown.
With a “Covid-Zero” strategy of trying to stamp out the Omicron variant, the Chinese government is imposing measures that are causing damage to local businesses and global supply chains.
Clearly, for anyone who buys China stocks the effects of slowing growth will be felt over the coming weeks and months.
In fact, just today, data on the Chinese economy came out showing that retail sales in the country in March declined by 3.5% year-on-year – notching up its first fall since 2020.
As we’re in April and the lockdowns continue, it’s important investors assess which stocks will be hit in the short term as there seems to be no end in sight to the “Covid-Zero” policy.
With that, here are two consumer stocks investors in Singapore should avoid as Omicron spreads in China.
The famed hotpot chain Haidilao International Holding Ltd (SEHK: 6862), that made waves with its free manicures as patrons wait for a table, has had a roller-coaster couple of years since listing in 2018.
After initially climbing nearly five-fold by early 2021, Haidilao shares have collapsed by over 80% since its all-time high nearly 15 months ago.
While the Sichuan-based business had a very popular concept, management got ahead of themselves by rapidly expanding its restaurant count.
In the fourth quarter of last year, Haidilao announced that it would be closing or suspending operations 300 under-performing restaurants.
While it ended 2021 with just under 1,500 restaurants globally, with over 90% of them in Mainland China, it had expanded that number from just 935 in 2020.
As a result, while revenue jumped 43.7% year-on-year in 2021 to RMB 41.1 billion (US$6.45 billion), its loss for the full year ballooned to RMB 4.16 billion – reversing course from its RMB 309.5 million profit in 2020.
A lot of the loss was attributable to “other business expenses” related to its ill-conceived expansion plans.
While the company is attempting to revamp its approach through management reform, it’s difficult to see how it can revisit its glory days with the uncertainty that surrounds Covid-19 lockdowns in China.
Dining out and face-to-face social interactions is what Haidilao’s business relies on. While it does have a delivery business, this arm only generated 1.7% of its overall revenue in 2021.
For long-term investors, the uncertainty tied to Haidilao’s business model (and Covid-19) appear to be too risky to me at this point.
2. China Resources Beer
It may come as a surprise to investors that the best-selling beer in the world – Snow – is owned by China Resources Beer Holdings Co Ltd (SEHK: 291), also known as CR Beer.
The firm is one of the biggest beer brewers in China via its mass-market label Snow beer, which is the most-consumed beer in the world by volume.
While it does have a local partnership with European beer giant Heineken N.V (AMS: HEIA) – with a focus on bringing premium beers to the Chinese market – CR Beer has seen its share price fall by nearly 30% in the past year.
While its profit did double in 2021, versus 2020, this was mainly down to a one-off gains, such as the initial compensation from the transfer of a piece of land owned by the company.
As a whole, overall beer sales for CR Beer in 2021 were flat year-on-year, although it did manage to increase its average selling price by 6.6% year-on-year.
And that was in a year when things were open in China. With urban hot spots like Shanghai, where premium beer sales are likely to be concentrated, in lockdown it’ll be hard for beer sales to rise this year.
Furthermore, if lockdowns persist, one of the first things to get cut from discretionary spending in China is likely to be alcohol.
Overall, it means the picture for CR Beer this year is going to be extremely challenging.
Consumer stocks in China looking shaky
While the power of the Chinese consumer is in no doubt, given the affluence and size of the overall population, there do need to be distinctions drawn.
That’s because specific consumer stocks in China will likely be hit first, and potentially the hardest, during this latest wave of Covid-19.
Taking that into consideration, it’s clear that Haidilao and China Resources Beer, given all the structural issues in place and ongoing Covid-19 lockdowns, should be avoided by investors during this period.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.