by Christopher Balding
The NanfangToday, 11:59
Given the widely acknowledged slowdown in the production side of the Chinese economy, the question has shifted to how rapidly the consumption and service sector in China is growing. Perma-pandas rejoiced last week when athletic apparel maker Nike reported 30 percent sales growth in China. Then Goldman Sachs, arguably the most perma of all perma-pandas given among other things their prediction of a 30 percent rebound back to 5,000 in Shanghai, produced a report comparing the new vs. old China economies. They produce data indicating revenue of new China which they define as leisure, health, and IT increased by 23 percent and old China defined as property, industry, and mining increased only 2 percent.
Though I do not have access to their study or data, I downloaded industry and sub-industry data on publicly traded companies in China from WIND to attempt to broadly replicate their findings. There appear to be some similarity from their findings with the data from listed companies but also important points to note about these headline findings from Goldman Sachs and Nike.
First, leisure is a sub-industry of the Hotel, Restaurants, and Leisure (HRL) industry that has seen operating revenue grow rapidly at approximately 49.6 percent YTD YOY growth. However, the HRL industry slightly contracted YTD by 0.5 percent with Hotels essentially flat with a slight decline of 0.3 percent and restaurants contracting by 16 percent. Furthermore, the Leisure sector according to WIND represents only 1.4 percent of the entire HRL sector. While it is perfectly accurate to say that Leisure is growing rapidly, it seems somewhat misleading when discussing it against the backdrop of economic rebalancing in the Chinese economy.
Second, the broader Health sector including services, products, and pharmaceuticals is growing solidly at approximately 10 percent, but significantly less than 20 percent cited by Goldman Sachs. It should be noted that there are a variety of sectors within the Health industry growing at or significantly more than 20 percent. Biotech, Healthcare Equipment and Services, Healthcare Equipment and Supplies, and Healthcare Providers and Services are all growing anywhere from 20-40 percent YTD YOY. However, the broader industry which includes significantly slower growing sectors appears to be growing at a healthy 10 percent, which is decidedly less than the 20 percent cited by Goldman. It is unclear if they are referring to the broader Health industry or specific sectors.
Third, the broader IT sector, and specifically the services and software sectors, appear to be growing robustly. Whether it is Software & Services growing at 32 percent YTD YOY or Technical Hardware & Equipment at 17 percent, our data broadly falls in line with the Goldman top line number of 23 percent.
Fourth, while I do not have access to the Goldman report, one industry appears to be broadly in line with public company data, one industry is moving in the same direction though decidedly slower, and one industry appears to not be match the Goldman data. The most likely explanation is that Goldman cherry picked specific sub-industries that painted a specific picture. If we turn to the Goldman definition of China from publically listed companies under the Real Estate sector, we receive some relatively different results. Operating revenue YTD YOY has increased a robust 36 percent. I have no explanation for the discrepancy.
Turning to some of the other old China industries the data is also very different from the Goldman data but in a very different way. Focusing on coal, oil, and gas sectors operational revenue declined 23 percent YTD YOY. Metals mining and processing operational revenue declined 12 percent YTD YOY. This includes industrial, precious, ferrous, and non-ferrous mining and processing.
If we look at industry, operational revenue is actually broadly flat or slow growth. Comprehensive industry increased 1 percent, Machinery 4 percent, and Electrical Equipment at 5 percent.
Summing up the old China industry, the data is not uniformly bad but indicates more weakness than Goldman finds when we look at a broader array of old industries. Here is the biggest problem with the Goldman presentation of the old and new China which cuts directly to the rebalancing, consumption, and services growth argument being made about China. If we take a broad picture of new China including the Goldman industries, then add in others that focus on consumption and services, total operational revenue grows by a healthy 9.4 percent. If we focus now on the old China definition used by Goldman and include other old industries we find total YTD YOY operational revenue decline of 14 percent. In a way the “rebalancing” is taking place with new China revenue growing healthily at 9 percent and old China declining by 14 percent. Economic activity is shifting.
Here is the major and most important point. Old China listed companies account for 78 percent of operational revenue while New China accounts for 22 percent. If we weight operational revenue of listed companies of the New and Old China variety based upon their percentage of operational revenue, instead of seeing moderately healthy or slow growing economy, we see weighted operational revenue decline of 6.3 percent. In other words, an overly simplistic comparison of revenue growth dramatically overstates the relative importance of new China. In other words, operational revenue for most of the Chinese stock market has fallen 6 percent in the first half of 2015.
A few final notes. First, this is not a replication of Goldman Sachs because I simply do not have their data or know exactly how they classified or divided industries. Second, while my method and data should be broadly similar there are key differences, which I have noted. Third, the data is not uniformly bad and the nuances need to be understood. Fourth, the negative growth in the large amount of listed companies is concerning. Fifth, while the rebalancing is occurring, it is not happening to the degree or how many believe.
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