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Insight on site: Recent discoveries in the “New Middle Kingdom”

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Sycomore AM’s portfolio management team has expanded in 2017 with the appointment of two global analysts-fund managers. One of them, Jessica Poon, recently went to China for an extended three-week fieldtrip to meet with 20 companies and exchange ideas with various government organizations. She went off the beaten path to experience first-hand consumption situations in lower-tier cities and to identify promising companies. Follow her steps in the Far East and discover three of her favorite picks.

Jessica Poon
Insight on site

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  • AIA: the largest pan-Asian life insurance company with a presence in 18 markets and the only 100% foreign-owned life insurer operating in China
  • Samsonite: the world’s largest travel luggage company with a diversified brand portfolio to capture growing travel demand
  • Yum China: the largest restaurant company in China, operating KFC and Pizza Hut restaurants in over 1,200 Chinese cities and towns


  • Capitalize on decades of consumption upgrade in China
  • Adapt to changing technologies which influence consumer behaviour rapidly
  • Gain market share amid intensified local competition


As the second largest economy with a 1.3 billion population, China has become increasingly important in the global economy and represents tremendous investment opportunities. At the same time, China is not a market one can understand easily. It is a vast country with uneven growth and wealth distribution. Despite the fact that China already achieved 9.1% average real GDP growth in the past two decades, we estimated 9% of the Chinese population living in the top ten Chinese cities accounted for 26% of the country’s GDP[1]. This means there is still a large Chinese population who have not fully reaped the benefits of the economic boom. At this pace of growth, there are significant social and economic changes beyond our imagination. For example, nearly 90% of transactions in China are now conducted electronically. We saw strangers transferred money to each other in the streets through payment applications like WeChat Pay and Alipay without hesitation. China is on track to be become almost “cashless.” As China tries to leapfrog and move up on the value chain, investors cannot form convictions by reading static annual reports and management presentations only. To gain unique insight, we must delve into the underlying trends and see what is happening on the ground.

We visited 13 Chinese cities ranging from a Tier 5 city with a GDP per capita of RMB30,000 (US$4,760) to a Tier 1 city with a GDP per capita of RMB167,400 (US$26,570)[2]. During our visits, we talked with companies, government entities and different consumer groups to identify key growth drivers across various income levels. Regardless of their household income, there is insatiable demand for Chinese consumers to improve their lives. This positive consumption sentiment is supported by continuous economic growth driven by government policies and surging property prices across the country in the past few years.

In China, consumption upgrade is manifested in many different ways. People in the lower-tier cities are discovering Western restaurant concepts like KFC and Pizza Hut, while people in the higher-tier cities are yearning for more premium experience such as traveling abroad and protecting their families with life insurance policies. We believe consumption upgrade in China is an unstoppable force that will last for decades, and AIA, Samsonite and Yum China are well positioned to benefit from this secular trend.

There is still a large Chinese population who have not fully reaped the benefits of the economic boom. At this pace of growth, there are significant social and economic changes beyond our imagination…


AIA Group is the largest independently-listed pan-Asian life insurance company operating in 18 markets. Originally founded in Shanghai almost a century ago, AIA was sold by AIG as part of its asset monetization plan after the 2008 financial crisis. As a result, AIG had to raise cash by listing AIA on the Hong Kong Stock Exchange in 2010. As of 2017, AIA had a total assets of US$216 billion and generated US$25 billion of net premiums and fee income.

Decipher Aia

We like AIA because it is a high-quality life insurance company with a significant exposure to China where there is a structural growth opportunity. In 2014, the Chinese government set out a target to achieve 5% of insurance premiums as a percentage of GDP by 2020. Currently, most of AIA’s new business came from Hong Kong (42%) and China (22%), followed by Thailand (10%), Singapore (9%) and Malaysia (6%). Benefitting from its long history of operations in China, AIA is the only 100% foreign-owned insurer allowed to do business there on a stand-alone basis. All other foreign insurance companies have to form joint ventures with local Chinese partners. Currently, AIA has licenses to operate in five relatively wealthy cities/provinces including Beijing, Shanghai, Shenzhen and the provinces of Jiangsu and Guangdong.

AIA has established a strong brand which Chinese consumers trust. It pioneered the agency distribution model to recruit and train high-quality insurance agents to serve the “mass-affluent” client segment. This strategy works well for AIA as it operates in cities/provinces with a rapidly expanding middle class.

To fully understand this distribution strategy, we interviewed AIA’s agents in Hong Kong and mainland China. We found AIA’s agents very professional, and they all spoke highly of their company’s training programs and culture. This attests to the quality of AIA’s agency model which sets the company apart from its competitors. Importantly, AIA focuses on providing protection products (i.e. medical, accident, term life and critical illness policies) rather than lower-margin savings products that are facing tighter regulations in China.

Leveraging on its premium franchise and salesforce, AIA has delivered impressive growth. In the past five years, the company achieved 46% of VNB[3] growth on average in China. With the upcoming liberalization of the Chinese insurance industry, AIA could potentially expand its footprint beyond the current five cities/provinces. Coupled with rising income and under-penetration of insurance policies in China, AIA is well-placed to increase market share in this fast-growing insurance market.

From the financial standpoint, AIA has a strong capital position and over US$12bn of free surplus, which will allow it to invest in organic growth, pursue M&A opportunities and return excess capital to shareholders.


Samsonite is the world's largest travel luggage company with a heritage dating back to 1910. The company designs, manufactures and distributes luggage and other products (such as business and computer bags, outdoor and casual bags and cases for electronic devices). It owns a broad portfolio of well-known brands across the entire price spectrum, including Samsonite, Tumi, American Tourister, Lipault, Speck and Kamiliant. Listed on the Hong Kong Stock Exchange and headquartered in Luxembourg, Samsonite is a truly international company generating US$3.5 billion revenues from Asia, Europe, North America and Latin America in 2017.


Samsonite is set to benefit from the rise of Chinese travelers: it is estimated that only 4% of the Chinese total population held a passport in 2015[4]. This is compared to 25% in Japan and 35% in the US. If we assume the passport penetration rate in China would increase gradually to 12% in ten years, there will be approximately 110 million new Chinese tourists going abroad by 2025. The Chinese market alone presents an attractive long-term growth opportunity for Samsonite.

To tap into this huge market potential, Samsonite has developed a diversified brand portfolio. Building upon the strength of the Samsonite brand which is popular within the mid-to-high end segment, the company acquired a premium US luggage brand called Tumi to solidify its position in the premium price range. For customers looking for affordable quality luggage, it offers American Tourister which lies in the middle price range. Realizing the importance of serving the mass market, Samsonite introduced the Kamiliant brand in emerging Asian markets to compete with other low-price luggage providers. This multi-brand approach allows the company to profit from different travel needs of Chinese people - no matter what your income levels are, you can always find a suitable luggage from the Samsonite’s brand portfolio. During our trip, we saw many travelers using Samsonite suitcases at various Chinese airports and observed decent traffic at Tumi stores.

Outside of China, Samsonite has ample room to expand the Tumi and American Tourister brand penetrations in Europe and other Asian countries. To do so, the company plans to maintain an advertising and promotion budget that is equivalent to approximately 6% of sales. It has also signed a contract with famous soccer player Cristiano Ronaldo who agreed to be American Tourister’s brand ambassador for two years. Benefitting from its extensive global distribution network and substantial advertising budget, Samsonite is poised to consolidate the fragmented global luggage market in the long run and to benefit from the Chinese tourist boom for decades.


Yum China (YUMC) is the first major global restaurant brand entering into China in 1987. Nowadays, the company operates over 7,900 restaurants in over 1,200 Chinese cities.
In October 2016, YUM China completed a spin-off from Yum! Brands and became a separately listed company on the New York Stock Exchange. With an operational headquarter in Shanghai, YUMC has the exclusive license to use the KFC, Pizza Hut and, subject to achieving certain milestones, Taco Bell brands in mainland China.

Judging from the overall Chinese market penetration rate, YUMC still has tremendous growth opportunities.
Currently, the company operates approximately six restaurants (KFC and Pizza Hut combined) per million population in mainland China. This is low compared to 15 per million people in Hong Kong and 36 per million people in the US[5].

Yum China

Using Hong Kong as a benchmark (where people have similar diet), YUMC could potentially double the number of restaurants in mainland China. What is interesting is that both KFC and Pizza Hut are underpenetrated in the lower-tier cities where the emerging middle class is trading up. Western restaurant chains offering a clean dining experience would be something that suit their tastes. No wonder during our visits in the less-developed Sichuan cities, we observed good customer traffic at KFC and Pizza Hut.

While the Chinese restaurant industry is very fragmented in China, there is a high barrier to entry for a restaurant chain with a low-ticket size like KFC. Currently, the average ticket size of KFC is around RMB 30 (US$4.7) per person.  At this level of selling price, a restaurant chain must need a large scale to afford an efficient supply chain that guarantees high food safety standards. Levering on its scale, YUMC also has a competitive advantage on marketing. The company can afford to spend US$333 million (around 5% of its sales) on direct marketing to engage a wide range of customers from young people to families. This allows YUMC to hire various popular celebrities as KFC ambassadors to appeal to different customer segments.

The Pizza Hut chain operates in the more competitive casual dining segment with a higher ticket size of RMB130 (US$21) per person. This restaurant concept is currently in a turn-around phase, and YUMC is proactively testing different new store concepts to find a right market positioning for Pizza Hut. The good news is that YUMC has a net cash position which allows the company to self-fund new store openings, restaurant refurbishments and other necessary capital expenditure to modify Pizza Hut. Led by an experienced local management team and supported by two strategic investors (Ant Financial Services and Primavera Capital Group), we believe Pizza Hut will gradually evolve into an appropriate restaurant model. Importantly, the company is cash-generative and has a US$420mm share buyback program remaining to return excess cash to shareholders.


AIA, Samsonite and Yum China share several durable qualities, including a relatively long history of operations in China, strong brand equity, unique product offerings, large operational scale, and capable management teams. These qualities will allow them to ride on this next wave of growth in the Chinese consumer market for a long period of time.

Combining our extensive on-the-ground research and in-depth fundamental analysis, we have identified a list of companies that are well-positioned to benefit from the consumption upgrade trend in China. Among them, AIA, Samsonite and Yum China share several durable qualities, including a relatively long history of operations in China, strong brand equity, unique product offerings, large operational scale, and capable management teams. These qualities will allow them to ride on this next wave of growth in the Chinese consumer market for a long period of time.


Click here to download our "Insight On Site in China" article in pdf

This document is not to be construed as an offer or solicitation to buy or sell any financial instrument whatsoever. Specific securities and their issuers are referred to solely for purposes of illustration and such references must not be interpreted as recommendations to buy or sell such securities. This promotional document has not been produced in accordance with regulatory provisions on promoting the independence of financial research. Sycomore Asset Management is not subject to the ban on making transactions on the financial instruments concerned before or during the dissemination of this document.

[1] Sources: China Statistic Bureau, Morgan Stanley Research

[2] Excluding Hong Kong and Macau. Source: Goldman Sachs Research

[3] Value of New Business

[4] Source: Goldman Sachs Research report, November 2015

[5] Based on the total number of KFC and Pizza Hut restaurants in the US and excluded the Taco Bell concept which has not been launched in China.

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