Top 5 Stocks to Benefit from China Plus One Strategy

Over the years, China has emerged as the global manufacturing hub, accounting for about 30% of the world's manufacturing output.

A good business ecosystem and low labour costs were why global companies picked China for manufacturing.

However, since the pandemic, global companies have been looking beyond China to manufacture their products.

China's zero-Covid policy led to industrial lockouts which led to longer lead times and high freight rates during the pandemic.

This forced global companies to downsize their operations in China and adopt what is widely known as the 'China plus one' strategy.

This turned out to be an excellent opportunity for India as the manufacturing cost is low here and the availability of skilled labour is high.

Additionally, the government's push towards making India a global manufacturing hub is making global giants consider India as an option.

Many Indian companies stand to benefit from the 'China plus one' strategy. We have shortlisted five such companies that you should watch out for.

#1 Dixon Technologies

First on the list is Dixon Technologies, one of India's leading manufacturers of electronics.

The company operates as an original equipment manufacturer (OEM) and original designing manufacturer (ODM) for several industries, including LED TVs, consumer durables, and mobile phones.

The company also offers repair and refurbishment services for the same.

Dixon Technologies' clients include Samsung, Xiaomi, One Plus, Havells, Bajaj, and Godrej.

With the global supply chain adopting the 'China plus one' strategy, a new opportunity has opened up for Dixon Technologies.

The company is already the fastest-growing mobile manufacturing company in India. Under the product-linked incentive (PLI) scheme it has set up a manufacturing facility to expand its mobile phone production capacity by 20 m units.

Moreover, with the PLI scheme extending to other industries such as IT hardware, lighting, air conditioners, wearables and hearables, Dixon Technologies has the capacity to emerge as the top EMS company in India.

This makes Dixon Technologies a potential choice for global companies for the 'China plus one' strategy.

In the last three years, the company's revenue has grown at a compound annual growth rate (CAGR) of 34.4%, driven by high demand for televisions, smartphones, and laptops. Net profit also grew by 16.5% during the same period.

The company has a high return on capital employed (RoCE) compared to its peers. Its three-year average RoCE is 30.1%.

Going forward, the company's established position in the market, growing demand for electronics, and expansion plans is expected to drive its revenue, especially from the export market.

To know more about Dixon Technologies, checkout its factsheet and latest quarterly results.

#2 Balaji Amines

Second on our list is Balaji Amines, one of India's leading manufacturers of speciality and fine chemicals.

The company has a diversified product portfolio and specialises in manufacturing methylamines, derivatives of speciality chemicals, and pharma excipients. Moreover, it also has a monopoly in most of the products it manufactures.

Some of its key clients include Aurobindo Pharma, Sun Pharma, Indian Oil, and ZydusCadila.

After China lowered its amines and other speciality chemicals production in 2018 due to strict environmental norms, the Indian chemicals industry saw its sales and margins improve.

Balaji Amines being India's leading player in the speciality chemicals space is also set to benefit from this.

The company is already investing in increasing its capacities. Apart from this, it is concentrating on forward and backward integration.

It is adding downstream products to its basket to benefit from value addition and low cost of production, thus making it a suitable option for global players.

Over the last three years, the Balaji amines revenue has grown at a healthy CAGR of 35.3% on the back of high volumes while its net profit has grown at a CAGR of 62.4% during the same time.

Its RoCE has also improved drastically from 19.8% three years ago to 45.5% in the financial year 2022.

Going forward, the company's expansion plans and entry into the electric vehicle space by becoming the sole manufacturer of chemicals for lithium batteries will drive its growth in the medium term.

To know more about Balaji Amines, checkout its factsheet and latest quarterly results.

#3 Aarti Industries

Third on the list is Aarti Industries, one of India's leading manufacturers of speciality chemicals and pharmaceuticals.

The company has a diversified basket of products and has a monopoly in manufacturing several chemicals. It also manufactures active pharmaceutical ingredients (API), intermediates, and xanthine derivatives.

Aarti Industries exports its products majorly to Europe, North America, Japan, and China. It has a diversified client base, and some of them are 3M, Dabur, Sun Pharma, and Bayer.

The company has been ramping up its capacities across all product lines to take advantage of the growing demand for speciality chemicals and fill the gap of the slowdown of production in China.

Being the largest producer of benzene-based chemicals and derivatives, with a market share of 25-40% for various products, Aarti Industries enjoys high economies of scale and hence the low cost of production.

Moreover, it also has a strong pipeline of over 90 products in the chemicals and pharmaceutical segment.

This puts the company in a sweet spot and makes it an attractive candidate for global players to invest in.

In the last three years, Aarti Industries revenue has grown at a steady CAGR of 19.7%, driven by growth in exports. Its net profit jumped 33.7% due to the low cost of production during the same period.

The company's RoCE averaged 25% for the last three years, which is higher than the industry average of 20.5%.

Going forward, the capacity expansion across product lines, diversified revenue profile, and low cost of manufacturing is expected to drive the revenue and margins of the company.

To know more about Aarti Industries, checkout its factsheet and latest quarterly results.

#4 Gokaldas Exports

Fourth on the list is Gokaldas Exports, one of the largest manufacturers and exporters of apparel in India.

Its product range spans across outwear, casual wear and bottom wear for men, women and children. Its products are exported to over 50 countries through the company's reputed clientele. Some of its clients include JCPenney, GAP, Adidas, Puma, and H&M.

Gokaldas Exports is capitalising on the China plus one opportunity by expanding its capacities across existing and new facilities.

It is planning to invest around Rs 1.2 bn for the financial year 2022 and 2023 for the same.

In the last three years, the company's revenue has grown at a CAGR of 8.8%, driven by growth in exports. Net profit, however, jumped 56.7% (CAGR) during the same time.

The company reported a RoCE of 19% for the financial year 2022.

Going forward, the company's expansion plan is expected to drive its growth.

To know more about Gokaldas Exports, checkout its factsheet and latest quarterly results.

#5 Trident

Last on our list is Trident India, a part of the Trident Group.

The company is a leading manufacturer of yarn, bed linen, bed linen, and paper. It also manufactures chemicals, FMCG products, and power for captive use.

It is the second largest player in home textiles and the third largest player in yarn manufacturing in India. It has a global presence in over 150 countries and a reputed client base such as Amazon, Wal-Mart, Target, and IKEA.

The company is capitalising on the 'China plus one' strategy by expanding its product base by adding new products and expanding the capacities of existing products. With the company setting up its own power plant for captive use, it aims to lower the cost of production.

This gives Trident an advantage over the others in the industry.

In the last three years, the company's revenue has grown at a steady rate of 13.9% due to growth in the home textiles segment. Net profit also improved by 34.4% during the same time.

The company's RoCE improved to 28.9% in the financial year 2022 against 13.1% the previous year.

Going forward, diversified revenue streams and new product expansion are expected to drive the company's growth.

To know more about Trident India, checkout its factsheet and latest quarterly results.

To conclude,

As disruptions in the global supply chain are causing delays in production and increasing lead times, there is an urgent requirement to look for an alternative manufacturing base.

To derisk the supply chain, global companies are considering other south-east Asian countries such as India, Vietnam, Bangladesh, Thailand, and Malaysia.

Hence India is not the only country in the race.

Indian companies need to understand what made China the primary option for global companies. China's low cost, fast turnaround times, and good quality were some of the reasons.

If Indian companies can get this right, they can surely capitalise on this opportunity.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...