China Trip Notes (5/27~6/5)
Thoughts on Chinese consumers and more
I visited China for 10 days, splitting my time between Beijing, Chongqing, and Datong. It was a mix of family visits, leisure, and business.
I have family in Beijing, so that’s where I usually go, but Chongqing and Datong were new experiences for me. I was impressed with both cities (in different ways) and enjoyed my stays at both.
Chongqing— famous for its “ma la” (numbing spicy) hotpot — was probably the most bustling city I’ve visited in China. It’s one of the four municipalities directly administered by the Central Government (alongside Beijing, Shanghai, and Tianjin). Chongqing plays a crucial role in the development of China’s Western regions, and as the largest hub of inland China, it is also a melting pot. Known as the “Mountain City,” its landscape, architecture, and climate actually share similarities with Hong Kong (some photos below).
Datong was a totally different experience. It’s a tier-4 city in Shanxi Province. Historically a coal mining town with one of China’s largest coal reserves, Datong has undergone a significant transformation. I was told that in the past, you could not enter the city without being covered in coal dust from head to toe. Today, it’s clean and peaceful, and I imagine the quality of life has dramatically improved for the locals.
However, as you would expect from a tier-4 city, consumer maturity is still at a different stage to that of coastal cities. Organized retail is still sparse. For example, to find a KFC, you need to go to a central plaza. Income levels are clearly lower; cab rides start at 7 RMB and a bowl of noodles costs around 10 RMB (half the price of Beijing). I also saw huge swathes of ghost apartment blocks, the scale of which was extraordinary.
What’s happening with Chinese consumers?
Consumption isn’t booming, but it didn’t seem to be too bad either. There were packed malls in some places, and there were not-so-packed malls in others. My conclusion this time is that there are no definitive conclusions—trying to generalize consumer behavior in a country as vast and diverse as China has its limitations.
For example, there are businesses benefitting simultaneously from both consumption downgrades as well as consumption upgrades. These are not mutually exclusive. This is happening in places like mid-upper class hotel chains (Atour) and sportswear (Anta, Li-Ning), as I’ll get into more detail later.
I believe it’s not particularly useful to debate whether the prevailing theme is consumption downgrade or upgrade. Instead, the focus should be on identifying businesses that truly deliver value, irrespective of which direction.
I believe Chinese consumers are becoming more "value-conscious." By value, I don’t mean "cheap" but rather quality for the price. Consumers now understand they don’t always need to buy the most expensive option to get the most out of it, but also recognize when it’s worth paying more instead of choosing the cheapest option.
Over the past decade, one of the dominant themes in China investing has been about “brand.” It’s not that I don’t believe brands are important, but resting your laurels on having some kind of brand in China, in my opinion, has become less meaningful. For example, people would say Starbucks has a strong brand in China, but does it actually deliver much value? Increasingly, I would say no.
In a market with so many brands, investors, more than ever, need to better understand the value propositions. This must be assessed in terms of competition and alternatives.
Many businesses that are “hitting the right spot” on the value spectrum today seem to be domestic Chinese brands. Across various sectors, domestic brands are gaining market share and I have a feeling they will continue to do well.
It's important to note that the value provided by these Chinese brands isn't due to running unsustainable losses. Many are already profitable or at inflection points. For example I’m amazed that businesses like Miniso and Mixue (which both happened to be quite popular in the locations I visited) manage to make a profit with offerings like 2RMB soft serve ice cream and 6-9RMB made-to-order tea drinks.
Consumers see value in their products or services, while at the same time these businesses are profiting — very good profit, in some cases. This is a compelling combination from an investor’s point of view.
Domestic hotel chains
During this trip, I chose to stay exclusively at domestic hotel brands. I thought that not only would I save money, but it would also be a great way to get a feel for how far China’s hospitality industry has come.
In the past, Chinese hotel brands were often poorly perceived, with low prices being their only advantage. I remember a trip 15 years ago when finding a Holiday Inn in a small city was a huge relief.
Today, the landscape has changed significantly.
Staying at leading Chinese brands like Atour and JI (H-World) is comfortable even by Western standards, while still being affordably priced at 300-500 RMB (US$40-70) per night. They may not offer full-service facilities like spas, swimming pools, or five-star restaurants, but they meet the needs of most domestic travelers with comfortable, well-equipped rooms and good customer service.
Here are pictures from a JI hotel (considered midscale) I stayed at for 300 RMB (US$40) per night. It featured an intelligent voice assistant, a large screen TV, a free minibar, a tea set, and premium amenities including a charcoal-bristled toothbrush. It beats a Holiday Inn.
Below are pictures from an Atour S Hotel I stayed at, categorized as upscale and priced at 600 RMB (US$80) per night. The room included an air purifier, automatic blinds, a smart toilet, an upgraded shower, and a very nice breakfast. I found the comfort level comparable to a Courtyard or a Doubletree, and in some aspects, I enjoyed Atour better like the highly localized Chinese-style breakfast menu featuring “regional specialties”.
I might be biased, as I'm long Atour shares ($ATAT).
Atour operates mostly on a 'manachised' model (capital light) and enjoys strong customer loyalty through direct bookings. The hotel industry has consolidated significantly post-Covid, with smaller independent properties closing and listed chain brands gaining market share. Atour has been a standout, growing its footprint threefold through Covid.
In the latest quarter, Atour generated a 22% operating profit margin while expanding its room count by 20-30% annually. Profit is growing 30%+, yet the stock trades at under 15x P/E.
It's one of my favorite long ideas at the moment, which I will be sharing soon. For this upcoming piece, I am collaborating with
(Moatless Capital on X) — who is one of the best China analysts I know — to bring you even better insights. Stay tuned!China’s Coffee War
One has to marvel at the density of coffee shops now in tier 1 cities.
We’ve all heard about the coffee war in China and the challenges Starbucks is facing, so I decided to see for myself.