Published on February 24 2014

Cashing In on Asian Materialism

A few months back, a young Chinese acquaintance of mine, who earns perhaps $500 a month, wrote to me about the loss of his iPhone.

As someone who still uses a 10-year-old cellphone, I immediately wrote back asking why he owned an iPhone in the first place, as I'm sure it cost a year or more of his savings. In his current state of affairs, my friend must walk in the biting cold of the Chinese northeast to stand in line to collect hot water. So it's safe to say he had better uses for that money, like moving to a place with a bathroom or hot water.

Alas, I just heard from him again. And guess what? He bought another iPhone, this one the newest, best model.

That anecdote is representative of my observations of Chinese consumer culture. Whenever I visit China, I'm always shocked to see that people leave a lot of food on their tables uneaten. And as I walk the streets there, I always find myself wondering why there are so many expensive cars parked outside rather decrepit buildings.

It took me a few visits to learn that in China, people with luxury goods aren't necessarily rich. Many women, for example, carry expensive name-brand purses. By outward appearances, they're doing well. But after getting to know them, I've realized that many Chinese people own a few expensive gadgets or garments, but are otherwise quite poor.

The common narrative is that China's success over the past few decades has been driven by Chinese citizens embracing their Confucian ideals of working hard and being thrifty. Even economic and business textbooks attribute China's success to those factors.

Chinese people do seem to be hard workers, so I can't argue with that. But in my personal experience, they're not thrifty. Far from it: by and large, as soon as they get a little money, they can't wait to spend it.

I think that the touting of Confucian thriftiness is mostly a myth perpetuated among certain China bulls, as well as a retroactive rationalization for China's successes of the last three decades. Michael Pettis, a Beijing-based economist, explains that a mere couple of decades ago, Confucianism was associated with being spendthrift and lazy. He says that the reason China's savings rate is so high is not because the Chinese are astute savers, but because household earnings are a small—and shrinking—part of GDP. In other words, Chinese households lack access to cash.

I'm a China bull myself. But I also believe we should look at the facts as objectively as possible. In this case, the facts do not support the mainstream view.

The Path Forward

To an investor, the million-dollar question is: how will today's poor to middle-income societies like China react to economic success? Will they save and invest to compound their wealth quickly? Or will they spend money as soon as they earn it?

Which answer you choose will lead to drastically different conclusions about how these countries will evolve economically, and how (and if) you should invest in them.

Personally, I'm betting Asians' high time preference (their desire to spend money now, rather than later) will win out. I visit malls in Asia often, and they're booming. I'm convinced that the growth of luxury goods and high-end services will continue and perhaps accelerate. It's pretty clear that as soon as Asian people have enough to eat, their brand consciousness kicks in, and they spend a disproportionate amount of money on status goods.

I think that kind of consumption should not come until these countries' economies are more mature and can better support it. But who am I to tell people how to live?

Regardless, here's a quick glimpse into the strength and financial prowess of the high-end sector in Asia:

  • A nightclub operator, Magnum Entertainment Group Holdings Ltd. (HK:2080), recently IPOed in Hong Kong. Its share price increased approximately 100% shortly after the IPO.
  • Prada's (HK:1913) brand value increased 30% in 2013.
  • Sands China Ltd. (HK:1928) has a market capitalization of US$60 billion.
  • Wynn Macau (HK:1128) has a market capitalization of US$22 billion. Macau, mind you, was a backwater colony of Portugal, dotted with a couple casinos, just 14 years ago. Now it's bigger than Vegas.

For now, my eyes are on Louis XIII Holdings Ltd. (HK:0577; HK$8.95). It's building a casino in Macau that, when it becomes operational in 2016, will have minimum gaming bets of HK$5,000, and rooms starting at HK$10,000.

In this high time-preference sector, I have a stink bid at HK$6.80. I'm watching closely, and if the company releases bad news, I'll drop or remove that bid. But as long as it continues to execute apace, I see good value from the stock going forward.