The China Report

The TD Cowen Insight

Some of the largest Western consumer brands are balancing growth and risk in China with investors discounting cash flow at high rates. Our survey suggests Western brands are highly relevant in China but are paired against robust local competition. Our findings also suggest the macro environment in China shows signs of stabilization balanced with sizable concerns on property prices and high savings.

TD Cowen China Consumer Survey

Our proprietary survey of 2,000 consumers across key cities in China is a unique data set that combines survey results with 12 analyst forecasts and views across consumer and tech. It details leading positions for Western brands relative to Chinese-based competitors.

We partnered with a Beijing-based advisory who conducted 2,000 in-person interviews. Those interviewed were consumers spanning across a cohort of 18-65 year olds, with low to high income across Tier 1, 2 and 3 cities. We cut the data based on income, age and other key demographics and included conclusions across softlines retail (including our proprietary Supply Chain tracker), luxury, beauty, restaurants, food, tech and Washington policy.

How do Western Brands Compare to Local Chinese Competitors?

Our survey shows spending intentions are stable and savings are high with 46% of consumers expecting housing prices to decline. Competition for consumer goods is scaling . Negative Chinese sentiment towards the West is notable; 24.8% of respondents find Western Brands less desirable in the past 12 months, 61.7% of respondents indicated that there had been no change in their view on Western brands and 13.5% answered that Western brands were more appealing.

Policy risks and potential downside surprises to China growth will continue and there is rising uncertainty as to which companies have sustainable advantage.

Chinese Respondents Household Savings Vs. Last Year

The leading Western brand preferences with Chinese consumers face macro headwinds, and rising Chinese-based competition create secular headwinds. While that positioning is consensus among investors, our view is broad risk to demand, margins and policy, while valuation of Chinese-based cash flow remains depressed.

Mobile Phone and Athletic Sportswear Preference in China

Our survey suggested that respondents who fell into the 'high income' bracket (33% of survey participants) had a stronger preference for Western mobile phone brands while the 33% of respondents who landed within the "middle income" bracket had a stronger preference for Chinese mobile phone brands.

Likewise, a Western brand had 28% of total Athletic sportswear preference share among the total Survey population with a leading Chinese brand taking 18% with share gains accelerating.

Chinese Respondents View of Western Brands Relative to 12 Months Ago

China Demographic Trends

Demographic trends in China are in secular decline and will exacerbate issues in growth, residential property, consumer confidence and wealth. The number of annual economic indicators made available by China’s National Bureau of Statistics has declined over 85% since a 2009 peak. Numerous researchers, including the U.S. Federal Reserve, have challenged the accuracy of official Chinese economic data. Our intent is not to weigh in on that debate but to illuminate Chinese consumer trends and preferences using proprietary survey data and connect those results to our expectations for key North American consumer stocks.

Potential Catalysts

We are watching companies' top-line, margin performance and qualitative commentary to understand trends. We are focused on the November elections in the United States to understand future China-related policy as geopolitical concerns are driving sentiment towards Western brands.

Metrics We’ll Continue to Monitor

An emerging concern among investors is the mechanism to repatriate Free Cash Flow given a potential long-term deterioration in U.S./China relations. We continue to monitor valuation multiples of our companies with exposure to China along with China-listed American Depositary Receipts (ADRs) and equity valuations to understand sentiment towards exposure to the region (which in our opinion is at the lowest levels since the pandemic). We detail company specific exposure to China, along with historical valuations of companies with outsized exposure to China, which suggests investors might be skeptical of the future value of China cash flows.