Weak Smartphone Demand, Strong Auto Recovery in China

China Readthroughs from Q2 U.S. Earnings (Part Two)

This is a sequel to my last week’s post on what the U.S. companies are seeing in China, with the focus on consumption. The key takeaway is that, while the Chinese consumption growth is slowing, the U.S. companies remain optimistic about the long-term growth in China, and continue with their aggressive expansions there. This is truly extraordinary given the increasing geopolitical risk and strained China-U.S. relations.

Before switching to the technology and industrial sectors, I’d like to add a few data points on consumption:

• China’s retail sales grew just 2.7% yoy in July, slowing further from June and well below the market forecast of 5% growth.

• Estee Lauder (EL) reported disappointing results from China, with sales in the region down 13% yoy last quarter. Not surprisingly, Shanghai was the hardest hit area due to the two-month lockdown. However, the covid impact was not limited to China, but also impaired the “travel retail” business in Asia (e.g. duty-free shopping). This was due to the strict travel restrictions and the absence of outbound tourists from China. I remember Nestle (NSRGY) had a similar problem not long ago. Its Japan sales turned weak because of a major reduction in Chinese tourists in Japan.

• Estee Lauder (EL) still expects double digit growth in China this fiscal year (beginning July 1, 2022), and sees “strong growth in the second half”. The company continues to launch new products / brands in China (e.g. Aveda) in partnership with Alibaba’s Tmall (BABA, 9988.HK) and JD.com (JD, 9618.HK).

Now switching to tech and industrials… China had a severe impact on both the sales and earnings of some U.S. companies in the second quarter. It was a double whammy.