3 stocks that profit from China's middle class

Rising incomes and demand for quality goods and services bode well for these companies.

By Traders Reserve Apr 2, 2014 2:56PM

Chinese yuan
Saaming/iStock / 360/Getty ImagesBy Karen Riccio 

By 2022, China's middle class is expected to rocket to 630 million people, an increase from 230 million in 2012. And Chinese consumers have been living higher on the hog over the past five years with average incomes growing 12 percent annually.

China has always been known as a hungry Red Dragon. Today's soaring incomes for some segments of the Chinese population means more disposable income. Middle-class and wealthy Chinese are bolstering their reputation as voracious spenders.


It's not just the number of yen Chinese consumers are dishing out. These consumers are also demanding higher quality food, goods and services. That all means huge opportunities for Chinese companies that cater to the needs of the middle class, especially those diving into the world of the Internet and online shopping.

Though the China market can be volatile, risky and not for the newbie investor, these three companies are certainly worth watching as they soar higher on the burgeoning middle class:


E-Commerce China Dangdang (DANG)

Like that well-known Seattle e-commerce behemoth with roots in online book sales, Beijing-based Dangdang has turned heads -- and finally profits -- since transforming into an online shopping mall.


After two years without profits, it turned the corner in the fourth quarter of 2013 and was met with a resounding 42 percent gain in stock price in the past three months. Revenue came in at $325.7 million, and 22 percent year-over-year, well above the $282 million consensus. Dangdang also added some 3 million customers in that quarter alone.

Today, China's e-commerce market is valued at $200 billion; the U.S. at $230 billion. The rate of growth in e-commerce has been a phenomenal 120 percent the past decade; it's on pace to reach $650 billion by 2020. The main reason China has to play catchup is because just 31 percent of its population can access the internet. China's growing middle class should help that effort.

Ordinarily when a stock moves as high and fast as Dang has, it gives cause to raise at least a yellow flag. However, estimates for this year call for earnings per share growth of 97 percent, suggesting pretty good prospects for the long haul.

Xueda Education Group (XUE)

This company will not only benefit from a rising middle class but also from the relaxing of China's one-child rule. Xueda Education Group fills the niche of operating tutoring centers for students, which is culturally aligned with the focus of Chinese families on educational achievement. Chinese children must pass strict testing to qualify for advancement in the educational system, so the tutoring is a high-value service.


Xueda also operates www.eduu.com and focuses on helping children and parents navigate the K-12 process, rather than seeking to monetize the Eduu platform. The company also runs xueersi.com, which has online courses, and revenue from the platform accounted for 3 percent of total revenue while the enrollment contribution in the third-quarter of fiscal 2014 was 17 percent. This translates into approximately $2.2 million in revenue for that quarter.


XUE has a $340 million market cap at its current price of $5.46 per share with $250 million in cash and no debt. For the past nine months, revenue rose 19 percent and net income climbed 95 percent.


Ever-Glory International Group (EVK

Ever-Glory International is a substantial supplier to large retailers outside China, and should benefit from government initiatives to increase consumer demand within China. As a contract clothing manufacturer for major U.S. and European retailers, EVK operates 644 LA GO GO clothing stores in China, with increasing same-store sales.

In its last earnings report, EVK announced a 54 percent revenue increase and a 74 percent hike in earnings per share. The company is planning to aggressively expand of its retail operations in China and it is outsourcing some manufacturing since labor wages in China are on the rise.


A substantial advantage for EVK is that it directly controls the sourcing of raw materials, manufacturing, design and marketing. As a result, while it usually takes competitors five months minimum to get new products on the shelves, Ever-Glory can do so in about three months after identifying a style change or popular trend.

EVK trades on average more than 30,000 shares per day, and the stock price more than doubled in 2013.

More from Traders Reserve

Tags: DANG
Apr 3, 2014 8:34AM

so these companies profiting are evil right?  they are only profiting because they are stealing from the chinese middle class right?


at least thats what the media in this country tell people

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