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Traders Seeking China’s Next Target Focus on Pets, Beauty Brands

Pets, Beauty, Logistics: Traders Search for China’s Next Targets

For investors in China seeking clues as to how far President Xi Jinping’s widening crackdown will go, any sector deemed to be of national interest could be in the crosshairs.

In the weeks following a ban on profits in the $100 billion education sector, stocks have gyrated on state media warnings on everything from gaming addiction, alcohol and e-cigarettes to over-marketing of infant formula. Authorities have this week also stepped up scrutiny over insurance technology platforms.

Investors have further reason for caution after a five-year plan released Wednesday provided a sweeping framework for further legislation. Strategists say upcoming targets could include anything running contrary to Beijing’s priorities of improving equality, shrinking a wealth gap, and encouraging people to start families.

Traders Seeking China’s Next Target Focus on Pets, Beauty Brands

“Sectors related to peoples’ livelihoods and which enjoy wide margins all face policy risks,” said Daisy Zhao, chief investment officer at Shenzhen Jianhong Times Asset Management Co.

Here are some of the sectors that analysts say could be at risk:

Beauty Firms

Things may not be looking good for beauty-related companies, such as those offering dermatological injections and other non-surgical procedures, said Jackson Wong, asset management director at Amber Hill Capital Ltd. He says the sector could be impacted by the drive to lower social costs. Regulation is currently considered to be relatively light in the industry, although there are signs of tightening restrictions.

Manufactures of ingredients for cosmetic chemicals, such as Bloomage Biotechnology Corp., Shanghai Haohai Biological Technology Co. and Imeik Technology Development Co. -- which is planning a Hong Kong listing and whose Shenzhen-listed shares have fallen more than 20% from a June high -- could be in the crosshairs, said Wong. He added that concerns may spread to homegrown beauty brands such as Yatsen Holding Ltd. in New York and Shanghai Jahwa United Co.

Pets

China’s burgeoning pet industry currently faces “almost no regulation” said He Qi, fund manager at Huatai Pinebridge Fund Management, adding that the sector could be perceived as competing with efforts to lower living costs and encourage more couples to have children.

Firms to watch include Yantai China Pet Foods Co., Petpal Pet Nutrition Technology Co., and Cheerwin Group Ltd. Veterinary vaccines maker Tianjin Ringpu Bio-Technology Co., is down 40% from a high in June.

Logistics

Logistics firms and those providing on-demand delivery services may face pressure, after guidelines enhancing food delivery riders’ rights hit shares of Meituan and others. Labor intensive companies whose competitive prices have largely relied on incomplete benefits and low pay may also be asked to rectify, hurting margins, according to Bloomberg Intelligence analyst James Teo.

“New guidelines enhancing China food-delivery riders’ rights could impact logistics firms’ margins, even if the rules don’t yet apply to workers not delivering food,” wrote Teo in a recent report.

Many firms in the sector often employ courier staff without providing benefits such as pension contributions and work injury or unemployment insurance. Though SF Holding Co., YTO Express Group Co., Full Truck Alliance Co., Dada Nexus Ltd. and others all provide logistics services, those that rely on outsourced labor could see a larger impact, according to Teo.

©2021 Bloomberg L.P.

With assistance from Bloomberg