Consumers in China’s smaller cities are more willing to spend than those in large, well-known Chinese cities like Shanghai that have had to battle Covid this year, JPMorgan analysts said, citing an American consumer branding expert in China. “There is an untold story about the stronger economic growth outside [Tier] 1/2 cities, and in the rural areas,” the June 14 report said, citing the expert’s optimism on parts of China outside its biggest cities. Chinese cities are typically grouped into tiers, with the first, largest tier including metropolises like Beijing and Shanghai. The unofficial designation classifies slightly smaller cities like Chengdu as second tier, with even smaller cities categorized as tier three or lower. The analysts described the unnamed expert as “an American running a consumer branding and innovation consultancy in China for the past decade plus” who lived in Shanghai during the lockdown and spoke at a webinar earlier this month with the bank. The hub for foreign business on China’s eastern coast ordered people to stay home for about two months, before resuming normal life this month. China’s capital city of Beijing has been trying to control a local Covid outbreak since late April. Migrant workers who used to work in Beijing or Shanghai might see their salary drop by 20% to 30% if they move to smaller cities or towns, but the cost of living then drops by far more, the JPMorgan report said, citing the expert. Statistics have indicated some movement of workers away from large cities to rural areas. It’s unclear whether that’s still the case or whether the trend is occurring at scale. “Cost of living is still low, and infrastructure and opportunities are only slightly worse than higher-tier cities, and access to healthcare, education and other public services is available,” the report added. “As a result, lower-tier city consumers are happier, are shopping more, are trading up, and are driving aspirational purchases, according to our expert.” Here are some of JPMorgan’s stock picks to play the trend. All have an “overweight” rating: Appliances: Midea Among the 20 stocks, Shenzhen-listed Chinese home appliance giant Midea had the greatest projected upside — of 71% — as of the report’s release. Net profit attributable to shareholders grew by nearly 5% in 2021 to 28.57 billion yuan ($4.26 billion). The company noted Chinese consumers are increasingly buying larger washing machines to replace smaller ones, and buying dishwashers with more functions such as sterilization and drying. Alcohol: China Resources Beer Hong Kong-listed China Resources Beer has the second-most upside on JPMorgan’s list of stocks, with 67% upside as of the report’s publication. The alcohol company is a subsidiary of state-owned conglomerate China Resources. In addition to owning popular local beer brands like Snow, China Resources Beer said it has a strategic partnership with the Heineken Group. China Resources Beer said profit attributable to its shareholders more than doubled last year to 4.59 billion yuan. Earnings from sales in the less developed region of central China, before interest and taxes, grew by nearly 57% last year. Autos: BYD Hong-Kong listed BYD is an emerging leader in China’s massive electric vehicle market, with a range of models on the market. The company, backed by Warren Buffett’s Berkshire Hathaway, is the automaker with the greatest upside on the JPMorgan list, at 30% as of when the report was published. In 2021, BYD said profit attributable to shareholders fell by 28% to 3.05 billion yuan, due primarily to a change in product mix that hit profit. The company did not specify which products. Automobiles and mobile handset components grew their contribution to BYD’s overall revenue in 2021 versus 2020, while that of rechargeable batteries declined slightly, according to the company’s annual report. — CNBC’s Michael Bloom contributed to this report.
