23 October 2016
Related listed companies such as baby formula makers are likely to benefit from the new policy. Photo: CNSA
Related listed companies such as baby formula makers are likely to benefit from the new policy. Photo: CNSA

Goodbaby stands to benefit from two-child policy

China ended its one-child policy after introducing it decades ago to control its population. It will now allow all couples to have two children.

Although the aging problem in China is not as severe as in the Japan, the low birth rate has led to a decline in working population for three consecutive years. China should abandon its old family planning rules to prevent the nation from repeating the Japan story.

If the two-child policy still fails to boost the birth rate, China is likely to further relax it to allow couples to have three children, or perhaps even scrap all the rules.

Related listed companies like baby formula makers may benefit from the new policy.

The Chinese Academy of Social Sciences released two studies in March and September, noting that the country’s birth rate is currently only 1.4 (which means every woman gives birth to 1.4 children on average).

The level is far below the generation replacement level of 2.1, almost touching the warning line of 1.3 that is recognized globally as the “low fertility trap”.

The studies said the scale of labor supply will reach a turning point during the next five years, further pushing up labor costs. If the trend continues, the population will start decreasing by 2030.

Aside from baby formula makers, companies that make other baby products also stand to gain from the new policy.

Since parents are becoming more safety-conscious, sales of car safety seats for babies are likely to rise.

Goodbaby International Holdings (01086.HK) is a major producer of such products.

Last year the company acquired two international baby safety seat brands, Cybex and Evenflo, and the integration is working well so far. It expects the two brands to fuel profit growth in the next two years.

Cybex and Evenflo are growing rapidly. In the first half alone, internal orders for the two brands reached 284 million yuan (US$44.9 million).

As the integration becomes deeper, profit in the second half is likely to increase.

Goodbaby said it expects sustainable growth in China following efforts to improve management for online and offline distribution channels.

According to Daiwa research, the company has diversified its client base and focused on its own brand in the past five years.

It said income from Cybex and Evenflo will offset the company’s loss of Dorel, which used to be its biggest customer.

Daiwa rates Goodbaby a “buy” with a target price of HK$3.9. Investors can consider buying at HK$3.3 to HK$3.4 as a mid-term investment.

This article appeared in the Hong Kong Economic Journal on Oct. 30.

Translation by Myssie You

[Chinese version中文版]

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