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4 Stocks That Will Benefit From China’s Transition to a High Income Country

According to most analysts, China is expected to be a “high income country” sometime early this decade.

The World Bank defines a high income country as gross national income (GNI) per capita of around US$12,375 per year.

That China will be a high income country is remarkable given how poor China was a few decades ago. The shift from poor China to its current status of “upper middle income” China has created plentiful investment opportunities.

Likewise, the shift from upper middle income China to a high income country could also create many investment opportunities.

Although growth is expected to moderate, China is expected to still grow fairly quickly. Given China’s size, even moderate income growth will translate into a lot of opportunities for many companies.

Here are four companies that I believe will likely benefit from this megatrend.

Meituan Dianping

If disposable income grows, many consumers will eat out more and order from food delivery services such as Meituan Dianping (SEHK: 3690) more.

Due to the higher disposable income, Meituan could potentially realise a higher average value per order which could help lift margins.

Since Meituan itself is a super app, the company can take advantage of the increasing incomes by selling other services as well.

Alibaba

Like Meituan, Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) has substantial exposure to China’s food delivery business through its food delivery division Ele.me.

Alibaba also has exposure to China’s economy through its e-commerce segment. Consumers with more disposable income mean merchants willing to pay more money to put ads on Alibaba’s e-commerce platforms to reach those consumers.

Consumers spending more could mean more mobile payments, which could help Ant Financial, which is 33%-owned by Alibaba.

Due to its sheer scale and years of investment in many digital technologies, Alibaba is well-positioned to take advantage of the increase in GDP per capita and the increasing digitisation of China’s economy.

AIA

AIA Group Ltd (SEHK: 1299) is a leading insurance company in Asia. Not only does it have a fast-growing business in mainland China but also many mainland Chinese visited Hong Kong (before Covid-19) to buy insurance policies from AIA.

If disposable incomes grow, demand for insurance will increase and AIA’s value of new business (VNB) could grow.

Due to Covid-19, the Hong Kong anti-government protests, and the recession, AIA trades for a fairly attractive valuation given the company’s competitive advantages and growth prospects.

According to Morningstar, AIA has a current price-to-book (PB) ratio of 2.03, which is lower than its five-year average of 2.46.

Budweiser Asia

Budweiser Brewing Company APAC Ltd (SEHK: 1876), otherwise known as Budweiser Asia, benefits from rising incomes through its leading position in China’s premium beer market.

Currently, China’s premium market comprises only 16% of the overall beer market, as opposed to around 40% in many developed countries in the West.

As Chinese incomes grow, more people can afford more expensive beer and Budweiser Asia is expected to grow substantially as a result of this thirst for more premium offerings.

Due to Covid-19 and poor investor sentiment, shares of Budweiser Asia trade at the lower end of its 52-week range of HK$18-32.65.

Foolish conclusion

China’s economy is expected to grow substantially over the next decade. Companies like Meituan, Alibaba, AIA, and Budweiser Asia are in a good position to benefit from China’s transition to a high income country that is geared towards consumption.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.