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Businesses set to cash in on baby boom

By Joseph Catanzaro, Li Aoxue and Chen Yingqun | China Daily Africa | Updated: 2014-02-21 08:32

Businesses set to cash in on baby boom

After the government announced changes to decades-old family planning rules, private sector operators from industries including healthcare and infant nutrition feel confident about babies boosting their bottom line. Photos provided to China Daily

New rules could be the shot in the arm the private healthcare industry needs

Businesses in China are banking on a billion-dollar baby boom in the wake of the nation's newly relaxed family planning rules, with private sector operators from industries including healthcare and infant nutrition already increasing capacity for a surge in demand.

The boost in business confidence comes as officials in Beijing are keen to give private sector healthcare providers priority treatment where an expansion of services is needed.

Cautious optimism at the prospect of a buoyed consumer market was sparked late last year, when the government announced changes to decades-old family planning rules that will see an estimated 20 million Chinese couples newly eligible to have a second child.

Private businesses are taking the lead, and say they feel confident about babies boosting their bottom line.

Chinadex International, China's biggest private healthcare provider, is already expanding obstetrics services and bringing more delivery rooms on line. The company's CEO, Roberta Lipson, says by the end of the year Chinadex will have increased the total number of maternity beds across all of their facilities by about 25 percent.

"We're already seeing a huge surge in interest in pre-pregnancy consultations," she says.

Richard Field, director of global dairy industry advisory firm Orrani Consulting, says a number of domestic and international companies in the infant formula business are currently "jostling for position" as they expand their operations in China.

Already worth about 60 billion yuan ($9.89 billion; 7.2 billion euros) annually, Field says the expected baby boom could see the infant formula market eventually grow by as much as 20 to 30 percent.

"The estimates have said you could be looking at an extra 2 billion yuan in sales (annually) from 2015," he says.

Field says the policy change is also likely to see increased profits for foreign dairy producers, particularly in Europe, Australia and New Zealand.

With official predictions indicating the policy shift will lead to an additional 2 million babies born per year - on top of the existing average of 16 million births annually - economists and Sinologists are predicting a number of other sectors could stand to benefit, too.

Diaper, toy and medical supply firms are expected to do well, while the jobs market for foreigners in China is also likely to see a bump with demand for professionals with specialist medical and education backgrounds predicted to rise.

Lipson says her company is looking to hire.

"There's definitely opportunity here," she says. "There is clearly a shortage of pediatricians in China, a shortage of primary care doctors and a shortage of well-trained obstetricians."

Yan Miao, an analyst at consultancy group Beijing S&P, says China's disposable diaper market was worth 20.11 billion yuan in 2013, a 19 percent increase from 2012. With the market penetration for baby diapers in China at 30 percent and climbing, he believes already strong growth potential will be further increased by the baby boom.

"Coupled with the low market penetration rate, the relaxed family planning policy will increase demand for paper diapers, and the market is expected to witness tremendous growth," he says.

In November, diaper giant Procter & Gamble opened its 11th factory in China, which came after Kimberley-Clark China's December 2012 expansion with a new disposable diaper production base in Nanjing.

Shi Dawei, brand manager for infant health products at Japanese chemical and consumer goods producer Kao Corp, says disposable paper diapers represent the fastest- growing sector of the baby products market in China. He predicts a double-digit growth in sales in the wake of the baby boom.

The education sector is expecting to gain in the medium to long term, and real estate developers say they are watching closely to see if a rise in the number of bigger families leads to demand for larger, urban-based apartments.

Wang Ning, CEO of Best Learning English, says educators are banking on the new family planning policy to prompt an upsurge in business. His company's revenue increased more than 100 percent in 2013, compared with 2012. The company now plans to increase the number of training centers it has geared to cater for children from 30 to 100 by 2015.

Wang predicts the increase in two- child families will have an impact on the type of education children receive. He says with the pressure to perform spread across two children, parents will be more likely to give both youngsters more leeway to pursue personal interests like music and art, which could spell opportunity for some providers and disaster for others.

"The business of training centers specializing in examination-oriented education will falter," he says.

Sun Xiuchao, manager at Homelink Real Estate Agency, says apartment prices in big cities like Beijing are unlikely to rise as a result of the baby boom for at least a decade. But he says in the longer term, urban property could prove a good investment. Currently, 45 percent of apartments in Beijing are sold to parents buying for their children, he says.

Bigger families may also see more Chinese in first-tier cities buy property in second or third-tier cities where the cost of living is lower, invigorating prices in frontier markets.

"The cost of living is really high in Beijing now," he says. "Some couples who are going to have a (second) baby will prefer to move out because of the expense."

The surge in investor confidence has also been given an official push.

In a document released by China's National Health and Planning Commission on Jan 9, the official body recommends that the private sector should be encouraged to expand capacity to meet new demand.

"It says specifically, 'where there is demand for new capacity, the private sector should first be considered'," Lipson says.

She says it is "a new way of talking" for China, adding that the baby boom may well be the shot in the arm that the private sector has been waiting for.

"I definitely feel like this past year has been an inflection point, a sort of opening of the door wider to private investors and private participation," she says, speaking about the healthcare sector.

Putting the value of the baby boom into context, she says in just one sector of the health industry alone, the additional number of births would be worth about 1 billion yuan.

"We're talking about 1 billion yuan just in birthing services," she says. "Then there's pediatrics care, baby products, nutrition products, toddler education and preschool; I think the numbers grow quickly from there.

"There are already a lot of people bringing on new capacity to meet this."

While many companies are forging ahead to expand capacity in a bid to capitalize on increased business from the baby boom, the impact on share prices has been mixed.

A number of major dairy and milk powder companies saw their share prices rise rapidly last year, in the days after the Third Plenary session of the 18th Communist Party of China Central Committee announced the changes to the family planning rules.

Yashili stocks went up by 9.7 percent, Biostime International was up 6.5 percent, Mead Johnson was up 5 percent and Beingmate 3.6 percent.

"As soon as the policy changed in November last year, you had some of the major players see their shares go up," Field says. "But then equally, they fell back the next day."

Field says he thinks major dairy and milk powder companies in China could well be a sound long-term investment. The toughest thing right now though, is picking who the big winners will be. With about 120 dairy and milk powder companies currently operating in China, Field says the industry is currently undergoing a period of much needed consolidation, and it is difficult to tell who will come out on top when the dust settles.

"I think it (investing) could be a very good long-term picture. But it comes down to picking the winners," he says.

Chinadex has seen its stock price climb steadily over the past year, but Lipson was hesitant to pin the upward movement on anything specific.

Junheng Li, founder and head of research for J.L. Warren Capital (a New York-based equity research firm specializing in China), says "part of the positive sentiment" sparked by the announcement of the new family planning rules has already been priced in to some dairy and healthcare stocks.

Li, whose recently released book Tiger Woman on Wall Street is attracting attention internationally, says the policy change is a very positive move both economically and socially for China. She says in the long term there are a number of sectors investors will want to watch.

"Changing (the) one-child to two- children policy is a very positive move: economically, psychologically and sentimentally to the society," she says.

"Demand for baby products including baby formula, diapers and specialty baby retailers will increase, although not immediately. There are other ways to play the loosening of the policy if one's investment mandate is not just limited to the secondary market (stocks).

"I think IVF, egg freezing and other infertility treatments will gain traction in a big way as older women decide they want a second child as well as younger women decide to have children later in their lives, a trend that we have witnessed in the developed economies over the past decade. The same thing will happen to China."

Li says that while private healthcare can be expensive in China, many Chinese women including those from middle-class backgrounds consider maternity care and services a one-off expense, and are willing to pay for it.

Both Field and Lipson see positive flow-on effects from any gains made by their respective sectors in China.

Field says changes to the way milk and dairy products are being sold domestically, coupled with the prospect of increased demand, mean pharmacies and e-commerce operators will be increasingly competitive with supermarket chains in the retail space.

Lipson says increasing need for obstetrics care will "certainly spark a chain of demand to many beneficiaries".

"In so far as the number of children will increase, there's definitely an opportunity there," she says. "As the number of births might increase, there will obviously be an increased demand for obstetric-and-pediatrics related products.

We are increasing the capacity of our obstetrics care, which means we're going to be buying equipment from somebody, to service that market."

Chang Kai, an economist and head of the School of Labor and Human Resources at Remin University, says more babies means new markets and new opportunities.

"For China, it will promote economic development," he says. "More consumer activity around babies will also create more job opportunities."

Professor Kerry Brown, executive director of Sydney University's China Studies Center, tentatively agrees a higher birthrate could present new business opportunities. In any case, he thinks investing in private healthcare in China is potentially a good bet. He says demand in big cities like Shanghai and Beijing suggests Chinese people want top-notch treatment and are prepared to pay for it.

"Beyond birthrate, there will be many reasons why the healthcare system in China would be a vast, potential opportunity in the future," he says. "The only question is how far the government will let it (the private sector) open up."

Professor Wang Feng, a demographer with both the University of California Irvine and Fudan University, says China hopes the relaxed family planning rules will have a positive effect on the economy. But he warns this is not a forgone conclusion and the issue is complex and fraught with variables.

The most pressing question is whether or not Chinese couples will actually have a second child, now that many of them can.

Last week China Daily reported that in the first region to bring in the newly relaxed family planning rules, the takeup has been slow.

Since Nov 19, about 3,000 couples have approached the health bureau in Zhoushan, Zhejiang province, to inquire if they were now eligible to have a second child. But only 87 women have sought official permission to have a second child, and 41 have been issued with a certificate to do so after the completion of a 30-day application process.

"I think we will see 1 to 2 million (additional births) per year for about three years, Wang says. "I think after that we will see a resumed decline in birth numbers."

Wang says while he thinks there will be businesses and sectors that will profit from an additional 1 to 2 million births per year, the new family planning rules as they stand currently are unlikely to have a meaningful impact on China's economy as a whole.

"I think that for certain products like milk powder and baby clothes even a 2 million increase (in births) on top of 16 million could be meaningful," he says. "A 10 percent increase could be meaningful for some industries. Overall, it does not have the power to have a major impact."

Contact the writers through josephcatanzaro@chinadaily.com.cn

Geng Lili, Wang Zhuoqiong, Wang Wen and Huang Ying contributed to this story.

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