US companies may find China exposure a growing headache

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Exposure to China has never been this fraught. For decades, the world’s second-biggest economy was seen as a can’t-miss opportunity. These days it is becoming a liability. 

Amer Sports is a case in point. The company behind Wilson tennis rackets and Arc’teryx parkas raised less money than hoped from its initial public offering this month. Concerns about its growing reliance on China and debt pile weighed on investor appetite for the shares. About a fifth of Amer’s sales came from China in the first nine months of 2023, up from 8.3 per cent for the whole of 2020. 

Being so closely intertwined with China is no longer the flex it once was. Its economy is struggling to regain traction. Relations with the US remain tense. A growing real estate crisis, shrinking demographics and rising youth unemployment are sapping Chinese household confidence. 

Recent earnings underscore these perils. Apple, which generates nearly a fifth of its annual revenue from Greater China, reported a 13 per cent drop in sales from the region for the December quarter. Estée Lauder cut jobs and profit guidance as the post-Covid rebound in spending in China failed to materialise. Caterpillar said Chinese demand for heavy machinery will be weak again this year.

Yet overall, China exposure still seems to be seen as a boon. The MSCI World China Exposure index, which tracks 52 companies with high Chinese revenues, hit a new high this month after gaining 30 per cent in 2023. That compares with the MSCI China index’s 13 per cent decline and the S&P 500’s 24 per cent gain.

The markets have reacted reflexively to one-off news, such as Apple’s China sales decline. But valuations have generally held up. Of the 12 companies on the S&P 500 with the greatest revenue exposure to China, only two — chipmaker Qualcomm and lithium miner Albemarle — have forward earnings multiples that are below their five-year average, according to a Lex review.

One explanation: the list is dominated by semiconductor-related companies, where the frenzy around generative AI has helped prop up shares. The picture is more mixed for big consumer brands. Estée Lauder, which gets 28 per cent of its sales from China, has seen its forward earnings multiple climb to a punchy 44 times over the past five years. Nike and Starbucks, with 14 per cent and 8.5 per cent exposure, have seen their multiples fall.

Investors in chipmakers should not be complacent. Companies like NXP and Broadcom, which get more than a third of their revenues from China, operate in precisely the area where Washington wants more trade restrictions. China, meanwhile, wants to become more self-sufficient in the sector. These companies also won’t be able to avoid the China drag.