Abbott, Nestle, Prepare to Profit from China’s Upcoming Baby Boom

BEIJING (TheStreet) -- Everyone loves a baby, including investors looking to profit from the recent liberalization of China's one-child policy.

Companies that make infant formula, incubators and squeaky toys are getting extra attention from Chinese stock investors now that most of the country's provincial governments have agreed to let more couples have two children.

Because Chinese parents often prefer foreign-brand baby food, global nutrition specialists poised to benefit include Abbott Laboratories (ABT), which this week announced a cooperative investment in China with the New Zealand dairy company Fonterra, and Nestle (NSRGY), which bought Pfizer's (PFE) baby food business in 2012.

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Millions of babies are likely to be born over the next few years to mainland couples who, under the adjusted rules, are eligible for a second because either the mother or father has a parent who was an only child. Most will be born in major urban areas where China's consumer class is rising.

The near-term baby boom for couples between ages 25 and 34 could be as high as 11 million births, based on the current number of married adults in that age range, according to government research. Some experts speculate, however, that for financial reasons only about half of these couples may choose to have a second child.

Ultimately, regional government family planning agencies will control the demographic pace, as each second baby -- like all babies in China -- must be approved by government officials before birth is allowed. Authorities in recent years have been approving between 16 million and 18 million births annually under the 35-year-old, one-child policy, which has kept the birth rate at a relatively low 12 per 1,000 people since the late 1990s.

Provincial governments started gradually introducing the second-baby policy in January in line with central government orders issued last fall. As of early July, according to state media, 29 of 31 local governments had to some extent adjusted their rules. Previously, a second child was allowed only in some rural areas, while a few rural minority families could have more.

The second-child baby boom should start late this year. Between Jan. 17, when Zhejiang Province was the first to make the adjustment, and May 31 about 241,000 couples out of 271,000 applicants got the green light to have a second child, National Health and Family Planning Commission Secretary Yang Wenzhuang told a press conference this week.

Some analysts expect the policy to boost the nation's slumping real estate market within a year, as families grow and move to larger homes. China's after-school education centers could swell with new enrollments in five years, followed by universities in the 2030s.

Investors seeking more immediate results are looking at medical equipment companies that make hospital maternity and newborn care products. One suggested target is David Medical, a maker of neonatal supplies such as incubators whose Shenzhen-listed shares recently recovered after a January sell-off.

Chinese consumers have been wary about domestic baby formula ever since a 2008 tainted milk scandal, propelling foreign brand sales. But China's largest powdered baby formula maker, Beiyinmei, and other domestic brands have also benefited from what Sinolink Securities said has been an overall 20% rise in formula sales since 2012.

The country's largest food and beverage group Wahaha apparently sees the profit potential. This week, privately held Wahaha reportedly started negotiating a possible takeover deal with Beiyinmei. Trading in Beiyinmei's Shenzhen-listed stock was suspended Thursday pending an announcement expected next week.

Playtime companies have drawn attention as well. CIC Securities recently said it "highly recommended" shares in Alpha Animation, which produces animation, books and plastic toys. The company and Hasbro (HAS) have been working together on global product development since 2012.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates ABBOTT LABORATORIES as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate ABBOTT LABORATORIES (ABT) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, expanding profit margins and notable return on equity. However, as a counter to these strengths, we also find weaknesses including deteriorating net income and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The current debt-to-equity ratio, 0.33, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.07, which illustrates the ability to avoid short-term cash problems.
  • ABBOTT LABORATORIES's earnings per share declined by 35.3% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ABBOTT LABORATORIES increased its bottom line by earning $1.50 versus $0.36 in the prior year. This year, the market expects an improvement in earnings ($2.21 versus $1.50).
  • The gross profit margin for ABBOTT LABORATORIES is rather high; currently it is at 57.53%. Regardless of ABT's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 7.15% trails the industry average.
  • Net operating cash flow has decreased to $336.00 million or 26.99% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed against the S&P 500 and did not exceed that of the Health Care Equipment & Supplies industry. The net income has significantly decreased by 31.1% when compared to the same quarter one year ago, falling from $544.66 million to $375.00 million.

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