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MarketScreener Homepage  >  Equities  >  Swiss Exchange  >  Nestlé    NESN   CH0038863350

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An investor's best friend: China's booming pet market sparks deals

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12/24/2017 | 01:04am CEST
Pet dog is pictured in a sofa as it waits to watch a movie at Cute Beast Pet Resort in Beijing

PINGYANG, China/SHANGHAI (Reuters) - Li Mingjie is a pet industry investor's dream. The 23-year-old e-commerce worker spares little expense to make his pooch happy.

"I'll happily splash out on my dog," Li told Reuters as he walked his brown poodle Coco in Pingyang, a town on China's east coast. "She is like a child to me." He is far from alone in China these days.

The growth in the middle class, a massive move to urbanization and other demographic changes - such as growing numbers of elderly, and people getting married and having children later than before - have been turning this into not just a pet-owning society but also one that is prepared to lavish money on them.

Chinese shoppers are set to spend 46.3 billion yuan ($7 billion) on their pets by 2022, up from 17.5 billion yuan this year as the market grows at around an annual 20 percent, according to estimates from Euromonitor. The U.S. market may be much bigger with an estimated $44.4 billion in sales this year but it is only growing around 2 percent a year.

The surge in Chinese demand is not only great news for global pet food behemoths such as Mars Inc and Nestle SA, but also rapidly growing Chinese pet food and product companies, as well as entrepreneurs setting up everything from dog salons for grooming to fancy pet hotels.

It is an amazing shift in a country where owning pets was once banned for being too much of a bourgeois pursuit under revolutionary leader Mao Zedong, and where - despite protests - there is still an annual dog-meat festival in the southern Chinese town of Yulin.

"There is huge growth potential in the Chinese market," said Liu Yonghao, the chairman of Chinese company New Hope Group [NWHOP.UL] at a recent event in Beijing, noting that younger people especially were developing closer bonds with their pets.

"They are willing to spend lots of money on the pets because they have become like part of the family," he said.

New Hope joined a consortium, including Singapore's state-owned fund Temasek and private equity firm Hosen Capital that just closed a $1 billion deal to acquire Australian pet food maker Real Pet Food Co, with the aim of bringing the firm’s brands to China.

The growing popularity of pets is turning China into a magnet for local and global firms.

Thomas Kwan, chief investment officer of Hong Kong-based fund manager Harvest Global, said China’s pet market would be one of his personal picks for 2018 as consumers looked to shift up to premium products.

The questions pet owners are asking now: "Can you buy them healthy foods? Can you give them a good lifestyle?" he said.

BONE-SHAPED CENTER

Pingyang, where Li lives with his poodle, has big ambitions in China's pet economy.

The county, which is near the wealthy city of Wenzhou and has a population of almost one million, is among a slew of places responding to Beijing's call to create 1,000 "specialty towns" by 2020 in industries from cloud computing to chocolate. In Pingyang's case the theme is pets.

It has a dog bone-shaped visitor center and pet factories, while locals said there were plans for pet-themed hotels and a retail hub. On a recent visit, though, it was clear the concept has a way to go. The visitor center was shut and locals admitted the ‘pet town’ had yet to fully catch on.

Nationally though, there is no doubt that the pet economy is thriving – helped by demographic shifts.

"Chinese society is aging, we're experiencing declining birth rates, we have empty nesters and the youngsters from those empty nests," said Zhang Tianli, co-founder of Hosen Capital, adding pets were helping people find "spiritual sustenance".

The pet products boom has stoked imports and boosted local business.

Among the Chinese companies that are now challenging the global giants, in China at least, are Shanghai Bridge Petcare, Sunsun Group and Navarch. Yantai China Pet Foods <002891.SZ> has seen its stock climb close to 60 percent since it listed in Shenzhen in August.

Smaller entrepreneurs abound too. They include DogWhere.com, which offers pet holidays and runs a boutique pet hotel in Beijing with all sorts of amenities for the pets - including a swimming pool, pet-sized bedrooms and a cinema. Owners can spend thousands of dollars per stay.

"We once looked after a dog in our hotel for 47 nights, at a total costs of 17,000 yuan ($2,585)," said the platform's marketing manager Wang Chao.

Xiao Xudong in Beijing runs a popular grooming service for "Westies" - West Highland White Terriers - and says his increasingly youthful clientele fly in from regions as remote as far-western Xinjiang and the southwestern Yunnan province.

"Young people hold a different consumption view to the older generations," said Xiao, 45. "They think a lot about how their pets are groomed and are willing to splash out on them.”

PET BATHING

Despite the growth, Chinese pet ownership is still just getting started. Some pets are mistreated and there is a lack of know-how about vaccinations and sterilization. Strict rules about pet food imports also stoke a gray market trade.

Earlier this month, police arrested gang members who were selling poisoned darts used to kill dogs that were then sold to restaurants, the official Xinhua news reported, opening the debate once more about the practice of eating dog meat.

Back in Pingyang's state-sanctioned pet town, the owner of one pet shop said the shift towards pet ownership was nonetheless stark.

"Ten years ago this place was basically farmland and people were eating dogs, now they don't eat them as much and have started to see them as pets," he said.

In the shop, Wang Jing, 26, was getting her two dogs - Can Can and Niu Niu - their regular bath. She said she spent around 2,000 yuan a month on them, mostly on food, but that it was all worth it when she arrived home each day.

"Otherwise when you come back there's nobody there," she said. "But if you have a dog then it jumps on you happily as soon as you open the door."

(Reporting by Anita Li in PINGYANG, Hallie Gu in BEIJING and Adam Jourdan in SHANGHAI; Additional reporting by SHANGHAI newsroom, Lusha Zhang and Shu Zhang in BEIJING; Writing by Adam Jourdan; Edited by Martin Howell)

By Anita Li and Adam Jourdan

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Financials (CHF)
Sales 2018 91 396 M
EBIT 2018 15 160 M
Net income 2018 11 203 M
Debt 2018 27 117 M
Yield 2018 3,16%
P/E ratio 2018 21,35
P/E ratio 2019 19,74
EV / Sales 2018 2,94x
EV / Sales 2019 2,87x
Capitalization 242 B
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Number of Analysts 26
Average target price 87,1  CHF
Spread / Average Target 10%
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NameTitle
Ulf Mark Schneider Chief Executive Officer & Director
Paul Bulcke Chairman
Magdi Batato Executive Vice President-Operations
François-Xavier Michel Marie Roger Chief Financial Officer & Executive Vice President
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