A professional investor tells us where he’d put his money. This week: Damian Taylor, portfolio manager Asia at Martin Currie, highlights three promising stocks
Urbanisation is an important driver of economic growth in China. City dwellers typically have larger disposable incomes, while the movement of people from rural to urban areas also increases the need for infrastructure development.
As investors in Asia, we review major policy amendments and assess their significance as drivers of structural growth in the region; the key issue for us is the impact of the wider trends on specific listed companies. So recent changes to hukou, China’s national residency registration system (similar to an internal passport) are certainly of interest to us, as they could further increase the urbanisation rate by encouraging rural citizens to move to China’s smaller and medium-sized cities. Hukou provides access to education, healthcare and social-welfare benefits. The government uses it to regulate the country’s population distribution.
The system is tied to the specific place where holders are registered as living, so it restricts freedom of movement and rates of urbanisation. Migrants who lack a local hukou pay more for social services and are barred from buying property in that area.
However, the 2019 Urbanisation Plan, published in April, lifts restrictions for new migrants to cities with populations between one and two million and lowers the threshold for developments with populations between three and five million; limits on key population groups, such as university graduates, have been removed entirely in the bigger cities.
What hukou means for investors
By relaxing residency rules, the Chinese government hopes to reinvigorate cities beset by net outflows and ageing populations, while the move should also address the uneven distribution of labour. From an investment perspective, the reforms are likely to affect a wide range of sectors.
In particular, the requirements of increased urban populations will be a driver for assets including infrastructure, real estate, utilities and essential services.
A province set to profit
One potential beneficiary is Guangdong Investment (Hong Kong: 270), the investment vehicle for Guangdong’s provincial government.
The company provides water to Hong Kong, Shenzhen and Dongguan, giving it a stable core business. But it also has a strong property portfolio in Guangdong province that is well placed to benefit from ongoing urbanisation in the region. Likewise, ENN Energy Holdings (Hong Kong: 2688), an early private-sector mover in China’s gas industry, is well positioned to enjoy the benefits of increasing gas volumes from higher urbanisation as well as the country’s shift in its energy mix from coal to gas.
Cash in on urban consumers
Finally, companies able to tap into increased consumption in the region are also of interest. Dairy Farm International Holdings (Singapore: DFI), for example, a leading pan-Asian food, home-furnishings and beauty retailer with excellent franchises across China and Southeast Asia, has a strong base of cash-generative businesses that provide a good proxy for economic growth and consumption in the region. It stands to benefit from both an increase in its urban customer base and higher rates of personal disposable incomes.