PDD's nearly 30% plunge last week on disappointing quarterly results is a reminder that Chinese consumption has largely left its years of double-digit growth behind. The slowdown shows little sign of picking up anytime soon. That doesn't mean it's good news for everyone. PDD's revenue grew nearly 90% from a year earlier, while profits more than doubled, noted Charlie Chen, managing director and head of Asia research at China Renaissance Securities. “Their share price reaction is out of step with their fundamentals,” he said in Mandarin, translated by CNBC. “The entire Chinese consumer market is weak, yes, but it's not a good thing.” [but] “The very peculiar comments by PDD management caused the stock price to fall,” he said. Chen Lei, chairman and co-CEO of PDD, warned several times on the earnings call about future profit declines. But analysts note that despite the target price cuts, the stock still has an attractive valuation. Other results have painted a less dire picture. Chinese food delivery company Meituan on Wednesday reported second-quarter revenue and earnings that significantly beat FactSet expectations. Revenue grew 21%, while adjusted earnings nearly doubled from a year earlier. Morgan Stanley upgraded the Hong Kong-listed stock to overweight from equal weight, while JPMorgan raised its price target to HK$140 ($17.95) with an overweight rating, according to FactSet. That’s up 18% from where Meituan shares closed on Friday, up nearly 10% for the week. The delivery company, which also owns the Chinese version of Yelp, said its business in retail, hotels and travel maintained “strong growth.” Management didn’t comment much on consumer sentiment, beyond a clear preference for value for money. “In the current macro environment, demand for low-end hotels has increased,” Chief Executive Wang Xing said on an earnings call, according to a FactSet transcript. Chinese booking site Trip.com, which is listed in the United States and Hong Kong, reported a slight increase in revenue and profit on Aug. 26, according to FactSet. Trip.com said bookings for travel outside China recovered to 100% of the pre-Covid level in the second quarter of 2019. That’s despite international flight capacity being just 75% of pre-pandemic levels, the company said. Trip.com’s Hong Kong-listed shares rose nearly 12% last week. “I think people are also shifting a bit more toward experience consumption than goods consumption, because goods can only be had to a certain extent,” said Liqian Ren, head of quantitative investing at WisdomTree. He noted that there is more pent-up demand for travel and expects it to persist for another year or so as people were able to buy goods through e-commerce platforms during the pandemic. However, Ren noted that the slumping property market and general uncertainty about income are limiting consumer spending. Retail sales grew 2.7% in July from a year earlier, after a 2% rise in June. Ren said an effective way for China to support the economy could be to take proactive, rather than reactive, measures: removing all restrictions on home purchases and allowing all people living in cities to access the same benefits. People who simply move to a city for work cannot necessarily enroll their children in local schools without obtaining what is called a “hukou.” Many cities, including Beijing, still restrict the number of properties people can buy. “As long as the Chinese government realizes it has a number of tools to get ahead of the market, then it will stop this slow decline of people not wanting to spend,” Ren said. Other companies, such as Yum China, are using new business strategies to boost profits despite lower consumer spending. In early August, the operator of KFC and Pizza Hut in China reported second-quarter earnings rose 19% to 55 cents a share, beating FactSet’s estimate of 47 cents. About 80% of those Pizza Hut stores have automated frying machines and 50% have robotic servers, according to Chief Executive Joey Wat, highlighting the overall automation of tasks from labor scheduling to inventory management. Yum China’s U.S.-listed shares rose more than 1% last week. Meanwhile, the generally tepid mood has supported a more conservative tilt by investors. Banks are one of the few sectors in Hong Kong’s Hang Seng Index that have risen double digits so far this year, according to Wind Information. Hong Kong-listed Postal Savings Bank of China is Morgan Stanley’s new top pick in the sector, analyst Richard Xu and a team said in a mid-August report. “We believe the changing monetary policy framework, moderating loan growth guidance and the People’s Bank of China’s support for long-term bond yields will create a favorable environment for banks.” [net interest margin] “We believe PSBC is one of the best-positioned banks to take advantage of this trend,” the report said. Morgan Stanley expects Chinese bank stocks could post their fourth consecutive year of outperformance this year. “We believe inventory in the property market will come down to a more reasonable level by mid-2025. That means the drag will be much lower in a weak economy due to the correction or slowdown in the property market,” Xu said in an interview. It is also watching to see if pressure to expand industrial capacity eases, which helps companies’ profit margins. “If those factors start to moderate over time, then some other sectors could outperform banks.”
