Mainland retail and consumption stocks will continue to be investment favorites among Hong Kong investors this year, thanks to the mainland's shift from an investment-driven economy to a consumption-driven one, analysts said.

 

"These stocks have been hot in the past year, given their steady and fat profits," said Andes Cheng from South China Research Ltd. "Investors' favor will definitely increase this year as a consumption boom is emerging in the mainland."

 

Among them, Lianhua Supermarket, sportswear manufacturer Li Ning, electronics retailer China Paradise, instant massage service provider Tencent, and dairy company Mengniu will all be stars in future years, a BNP Paribas report said.

 

Local individual investors forecast mainland retail and consumption stocks will be the least volatile, profitable investment tools.

 

Two newly listed mainland retailers, for example, witnessed big price jumps in past months on the Hang Seng Index.

 

Shares of department store operator Parkson jumped by nearly 90 percent to HK$18 (US$2.31) apiece from its offering price of HK$9.8 (US$1.26) in less than two months.

 

China Paradise, the mainland's third-largest white goods retailer, also saw its shares rise more than 50 per cent since its debut in October.

 

In a long run, the mainland's efforts to vitalize its consumer and service sectors will be a shot in the arm for these stocks, Cheng said.

 

The mainland's consumption sector currently accounts for one-third of the economy, a figure significantly less than the two-thirds of the developed economies.

 

The central government is determined to spur consumption to reduce over-reliance on exports and soak up overcapacity from the old investment-led economic mode.

 

The move would hopefully help the consumption sector contribute another 3 to 4 percentage points in gross domestic product, said Qu Hongbin, a senior economist with HSBC China.

 

"That sounds like music to retailers' ears," Cheng said.

 

Also, the emergence of a younger, spendthrift generation under the mainland's one-child policy will bode well for these stocks over the next decade, BNP Paribas said in a report titled "The Power of One."

 

These spenders will "gradually shift China from being a nation of savers to a nation of spenders," it said.

 

And as a result, consumer products and shop-fronts "will be key beneficiaries," including producers and retailers of fashion, apparel, cosmetics, household furnishings, electronics, health foods, medicines, individual life insurance and high-end automobiles.

 

That would give local investors who buy mainland retail stocks a vote of confidence.

 

However, foreign competition would be the largest challenges facing mainland retailers, the report said.

 

A number of foreign retail giants have been competing to rush into the market since the mainland opened up the retail sector to foreign retailers at the end of 2005 under its World Trade Organization commitments.

 

Competition in the domestic retail sector continues to intensify as many more international brands enter the market.

 

(China Daily January 24, 2006)