Analysis: Chinese flock to home-grown brands in golden opportunity for investors

Xtep International Holdings

28/06/2021 24:00

* Backlash against foreign brands among factors driving
demand
    * Chinese consumer firms raise $11 bln in first 5 months -
Cygnus 
    * Up to 200 brands are seeking new capital - bankers,
investors
    * China brands sell more vs global brands in JD.com shopping
festival

    By Sophie Yu and Kane Wu
    BEIJING/HONG KONG, June 28 (Reuters) - He Shuang, a student
at a U.S. university stranded in her home city of Chongqing in
southwest China during the pandemic, has added more than 300
domestic brands to her list of favourites on Alibaba's  9988.HK 
Taobao online mall.
    Like with He, Chinese brands are hot with most shoppers and
have spurred billions of dollars in investment, as consumers
increasingly make patriotic choices amid a growing backlash
against foreign brands https://www.reuters.com/business/retail-consumer/chinese-apps-join-celebs-backlash-against-western-fashion-brands-over-xinjiang-2021-03-26
 in the country.
    A surge in online shopping after people were forced indoors
due to COVID-19 last year, a recovery in the market since then,
and infrastructure that allows vendors to scale up swiftly have
also propelled demand for local brands.
    "Once you try, you find the quality of local products is as
good as foreign products," said the 19-year old He, who favours
home-grown labels from Carslan eye shadows and Feiyue sneakers
to Bestore Co  603719.SS  snacks and Miniso  MNSO.N  homeware.
    Maia Active, a Sequoia Capital-backed athleisure wear maker,
said its products were designed based on body measurements of
Asian women and, therefore, offered local customers a better fit
and more comfort than western counterparts.
    In lockstep with demand, investors too have been pouring
funds into local consumer brands this year.
    Chinese consumer firms raised 69.7 billion yuan ($11
billion) from primary market investors in the first five months,
more than double the year-earlier amount, according to Cygnus
Equity, a Chinese boutique investment bank. 
    "Beauty products, food and beverage brands are the most
popular. Recently hotpot and ramen brands are particularly
coveted," said Ming Jin, managing partner at Cygnus. 
    Up to 200 brands are currently seeking new capital from
investors, bankers and investors said.
    "China is the easiest market for building something from
zero to a 100-million-yuan sales target," a private equity
investor in tea chain operator Nayuki  2150.HK  said, declining
to be named as he was not authorised to speak to media.
    Nayuki last week raised $656 million in a Hong Kong float,
which gave it a valuation of $4.4 billion, more than double the
level in a December funding round.
    Weilong Delicious Global Holdings, whose flour-based spicy
sticks sell for under 5 yuan per pack, raised 3.56 billion yuan
in May from big name investors including Tencent  0700.HK , Jack
Ma's Yunfeng Capital, CPE, Hillhouse Capital and Sequoia Capital
China. The snack maker was valued at nearly 70 billion yuan.
    Sequoia-backed Genki Forest, a soft drink brand seeking to
challenge Coca Cola, said it was valued at $6 billion after an
April fundraising, ten times more than 18 months earlier.
    Its fundraising attracted investors such as Louis Vuitton
owner LVMH's  LVMH.PA  private equity arm and Singaporean state
investor Temasek  TEM.UL .
   
    LOCAL VS GLOBAL
    During JD.Com's  JD.O  online shopping festival this month,
sales growth of Chinese brands was 4% higher than international
brands. The growth in their customer numbers exceeded that of
international brands by 16%, JD.com said.
    Chris Mulliken, a Shanghai-based partner at consultancy EY,
said nationalism was a factor driving the popularity of local
brands, including pride in China's recovery from COVID-19 even
as several other countries battle high infection rates.
    "People are travelling (albeit domestically) and taking the
opportunity to rediscover their own country, return to their
customs and discover new Chinese brands," he said.
    The recent Xinjiang cotton ban imposed by several global
brands including H&M  HMb.ST , Nike  NKE.N  and Adidas
 ADSGn.DE  over concerns about alleged rights abuses in the
province, which offended many Chinese consumers, was another
catalyst. China strongly denies the claims and says all labour
in Xinjiang is consensual and contract-based.  urn:newsml:reuters.com:*:nL4N2LU10F
    Shares of domestic sportswear producers Xtep  1368.HK , Li
Ning  2331.HK  and Anta  2020.HK  have risen 196%, 60% and 38%
respectively since April.
    Dealmakers have warned about the sharply higher valuations,
while they also say the demand trend will stay for a long time.
    "Consumers no longer idolize international, multinational
brands. They like products and brands that speak for them," said
Nina Gong, a Shanghai-based managing director with private
equity firm Carlyle Group.
 ($1 = 6.4525 Chinese yuan)

 (Reporting by Sophie Yu in Beijing and Kane Wu in Hong Kong;
Editing by Himani Sarkar)
 ((Sophie.Yu@thomsonreuters.com; 861056692136;))