How China's Pivot Could Boost the Fortunes of these 5 Indian Companies

China Plus One.

If you've keep up with the latest business news, you would have come across this term.

It's the name of a huge economic shift happening in the world right now. It's a megatrend that is gaining in strength and is long-term in nature.

So why should you be thinking about this?

Well, this megatrend will create massive wealth for Indians investing in the stock market.

In fact so much wealth will be created that it's impossible to even estimate it at this point. After all, this is an evolving megatrend. The great news is that it's getting stronger and will last for a long time.

So how do we go about making money from this?

The first step is to understand this megatrend.

China's Pivot from Capitalism to Socialism

China's economic boom began in the late 1970's when Deng Xiaoping took over the reins of the country from Mao Zedong.

Mao's policies - 'The Great Leap Forward' and The Cultural Revolution' - were disastrous and had kept China poor for decades.

Deng wanted to change that. He wanted China to be a prosperous and strong nation.

He quickly implemented economic reforms and made it easy to do business. China opened its economy to foreign investment and built infrastructure on a massive scale.

The Chinese economy boomed. It's annual GDP growth rate exceeded 10% and remained in double digits for three decades.

The result is for all to see. Hundreds of millions have been lifted out of poverty. Chinese cities are icons of modernity. Its infrastructure projects - long and broad highways, bustling airports, massive dams, high-speed railways, large and super-efficient ports, tall skyscrapers - are the envy of the world.

And the Chinese people became wealthy too.

Today, China's per capita GDP is about US$ 12,500. India's per capita GDP is five and a half times lower at about US$ 2,250.

It's all very impressive but what about the future?

Well, that's where the entire narrative on China changes drastically.

You see, what got China here, i.e. capitalism, is not the path it has chosen for its future.

China of the future is going to be very different from the China we know today.

China has chosen to pivot from capitalism to socialism as the main driver of its economy.

The New China

If you've been following the news coming out of China recently, then you would be aware that China's leader Xi Jinping, has established himself as a dictator. He has changed the rules of the Chinese Communist Party (and the country) to give himself a third term in power.

Technically, he may not hold all the power in China but that's just an illusion. There is no doubt that he is the man in charge now. And no one will even think about questioning him. For all practical purposes, he will be in power for life, unless he steps down or is overthrown.

Xi Jinping has a vision for a new China. He calls it the 'Common Prosperity Program'.

What does that mean?

It means he wants every Chinese to get wealthy, no matter what the cost. He does not want income inequality, the gap between the rich and the poor, to increase. He wants the rural areas and the interior regions to be just as prosperous as the China's coastal cities.

How will this happen?

Well the plan is not to reverse capitalism. Instead, the government will now make decisions based on 'equality' and not 'growth'.

For every decision they take, the government will ask questions like these...

• Will this decision benefit the rich rather than the poor?
• Will the gap between the rich and the poor increase as a result of this policy?
• Will this move result in more migration from rural interior villages to the rich coastal cities?
• Will this scheme prioritise wealth creation over wealth distribution?
• Is there a chance of social unrest?

If the answer to these questions is yes, then the policies may be modified or put on the backburner.

It might seem hard to believe but this is exactly what 'Common Prosperity' is all about. The Chinese government wants to make it clear that they want to reduce inequality in their country. If this means a reduction in pro-growth policies, then so be it.

The Real Reason Behind the Pivot

Most people in the world don't understand China. That's fine. Most people are only interested in their own lives. But if you want to be a successful investor, then you must make the effort to understand China.

If you don't, you will expose yourself to potential losses and also miss out on potentially life-changing profits.

One of the most important things to understand about China, is that all the power in the country is in the hands of a few people. These people are the leaders of the Chinese Communist Party. Nothing in China can happen without their direct or indirect consent.

There is no decentralised governance in China. All the bureaucrats running the country at the state, district, and local levels, are members of the party. They are appointed, not elected. The people's opinion doesn't matter. The party is supreme.

Many people are surprised to know that even the Chinese armed forces serve the party and not 'the country' or the people. This is why the leader of the Chinese government, is also the leader of the military, and the leader of the party, all at the same time. These three positions are never separate.

Thus, China 'the country' and China 'the communist party' are the same thing. Those who think China will abandon communism and become a democracy, have not taken the time to understand China.

And now that Xi Jinping is a dictator in all but name, his top priority is to hold on to his power, i.e. ensure that he is not overthrown in a coup.

Media reports from China have made it clear that he has either gotten rid of or side-lined, all his opponents within the party already. The military is also fully on his side.

He now has only one thing to worry about, i.e. the people.

Now the people's opinion may not matter in China, but that doesn't mean they can be ignored. If they feel the government does not have their best interest at heart, or is incompetent, they may protest.

We have already seen many protests in China recently. None have made a dent in the power of the party, yet. But these protest have clearly rattled the top leadership.

This is the real reason behind the 'Common Prosperity Program'. If there is social and economic harmony in the country, the people won't think of protesting. They will go about their lives and leave the government alone.

Thus, the communist party will be able to rule China for decades to come.

China and the World

Now all this wouldn't be such a big problem to the rest of the world if China co-operated with other countries and respected their views.

But the new China will forge its own way.

The world, over many decades, has established many multilateral institutions, like the UN, WTO, etc, to form certain mutually beneficial rules. Countries abide by these rules because they know it's in their interest to do so.

China used to do this too...but not anymore.

The new China views the so-called 'rules based world order' as a hangover of colonisation. In other words, it sees global institutions as mere tools of western nations, which are used to impose 'their rules' on the rest of the world.

Thus, in China's worldview, if it's not in charge of these global institutions, i.e. it's not the one making the rules, then it won't follow the rules.

This is the thinking that underlines China's hegemonic approach towards the world. It wants to dominate. It want's all nations to see China as a superpower, one that will eventually replace the US.

So they refuse to go along with the rules that other nations follow.

A clear example of this is the human rights problem in the north western Xinjiang province. China has rejected the allegations of abuses and refuses to abide by globally accepted human rights practices.

This is also the thinking that's at the heart of many territorial disputes, on land and sea, that China has with its neighbours...including Taiwan.

This hegemonic outlook towards the world will continue to drive away western companies from China. It isn't happening on a large scale right now but the process is likely to accelerate in the future as China picks more fights.

The Taiwan Question

There was a time, not long ago, when China wanted to settle the Taiwan issue via dialogue. That time has passed. Under Xi Jinping, China has made one thing very clear to the whole world.

It will take Taiwan by force.

China's military isn't up to the task yet, not with the US Navy standing by. But it would be foolish to think that China doesn't have a plan to take Taiwan. It most certainly does.

China knows it's not militarily strong enough to launch an invasion of Taiwan. But it also knows when it will be. It's armed forces have grown and modernised at a stunning pace. It can now boasts of a military that can field the most modern weapons.

No one knows when China will invade Taiwan. But one thing is certain. The world will change forever on that day. It will mark the point of no return for China.

Western business will flee China. The country comes under heavy sanctions. It could go to war with the US.

Whatever the outcome of that conflict, the biggest losers will be the western companies still doing business in China. They will have to relocate.

India will be their top destination.

The Economic Impact

This pivot from capitalist 'growth at any cost' to socialist 'equality at any cost' will trigger a huge megatrend in the global economy.

In fact, it has already begun.

The media calls it China Plus One. It's a strategy used by large companies to move some of their manufacturing plants out of China and in to at least one other country. This is usually, Vietnam, Taiwan, Mexico, Thailand, or India.

As investors, we eagerly look for news of companies shifting from China to India. And we should.

But do we understand the big picture?

Individual companies may capture a small piece of the market created by this megatrend in the short term. But long-term investors should keep their eyes open for great opportunities that can potentially deliver 50-100x returns.

This is a once in a generation opportunity for India to establish a strong manufacturing base and emerge as an economic superpower.

Focus your attention on those companies that have their eyes on the long-term prize of becoming global manufacturing giants. Stocks of these companies will be the biggest wealth creators of this decade.

Of course, the companies that will profit from this megatrend will change over time. Today's list of such companies won't be the same as a list made next year or the next.

But as things stand today, the top sectors to focus on now are electronics manufacturing, speciality chemicals, and textiles.

There will be more opportunities in the future, but these three sectors are the best places to look for future multibagger stocks.

So let's discuss 5 companies that have already started to profit from China's pivot. These are not recommendations. These are stocks that you should have on your watchlist so as to buy them at an appropriate valuation.

#1 Dixon Technologies

Dixon Technologies is 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. This includes LED TVs, consumer durables, and mobile phones. It 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.

It's a good choice for global companies looking for an Indian partner in their China Plus One strategy.

Also, the PLI scheme is being extended to other industries such as IT hardware, lighting, air conditioners, wearables and hearables.

Thus, Dixon Technologies has the capacity to emerge as a major global electronics manufacturing company in the long term.

The company's established position in the market, along with its expansion plans, will drive its long-term growth, especially from exports.

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

#2 Balaji Amines

Balaji Amines is one of India's leading manufacturers of speciality and fine chemicals.

The company has a diversified product portfolio. It specialises in methylamines, derivatives of speciality chemicals, and pharma excipients. 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.

It's India's leading player in the speciality chemicals space. Thus, Balaji Amines is one of the top contenders to benefit from China's pivot. As more of the speciality chemicals industry shifts out of China, the company can emerge as a major global player.

To this end, the company is already investing in increasing its capacities. It's also concentrating on forward and backward integration. It's adding downstream products to its product basket. Thus, it will benefit from value addition as well as low cost of production.

The company has also planned to enter the electric vehicle space. It will manufacture chemicals for lithium ion batteries.

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

#3 Aarti Industries

Aarti Industries, one of India's leading manufacturers of speciality chemicals and pharmaceuticals.

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

It's the largest producer of benzene-based chemicals and derivatives. It has a market share of 25-40% for various products. Aarti Industries enjoys high economies of scale and low cost of production. It also has a strong pipeline of over 90 products.

Aarti Industries exports its products majorly to Europe, North America, Japan, and China. It has a large client base. Some are distinguished names like 3M, Dabur, Sun Pharma, and Bayer.

The company has been ramping up its capacities across all product lines. It's well placed to take advantage of the growing demand for speciality chemicals which China is unable to fill.

This puts the company in a sweet spot and makes it an attractive candidate to take advantage of the slowdown in China in the long term.

It's capacity expansion, along with its edge in low cost of manufacturing, will drive revenue and profits of the company.

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

#4 Gokaldas Exports

Gokaldas Exports is one of the largest manufacturers and exporters of apparel in India.

Its product range spans outwear, casual wear, and bottom wear for men, women, and children. Its products are exported to over 50 countries. Some of its clients are top global brands like JCPenney, GAP, Adidas, Puma, and H&M.

Gokaldas Exports is capitalising on the slowdown in China's textile industry by expanding its capacities across existing and new facilities. It will invest around Rs 1.2 bn over 2022 and 2023 for the same.

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

#5 Arvind

Arvind is the flagship company of the Ahmedabad-based Lalbhai group. It's one of India's leading vertically integrated textile companies.

The company is one of the largest denim and woven fabric manufacturers. It has a strong presence in the industry with a history of more than eight decades.

Arvind is one of the biggest beneficiaries of the ongoing China Plus One strategy. Global textile brands are gradually diversifying their supply chain as part of this strategy. This has resulted in increased exports for Arvind.

The company is also present in the real estate business. Arvind owns 525,000 square yard free-hold land in Gandhinagar district, near Ahmedabad city. It will monetise the land by developing part of it.

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

Conclusion

China claimed its rise would be peaceful. Now we know that's not the case.

The new China under Xi Jinping will likely be a source of trouble for the world. More so than any other country in the past.

What makes China especially dangerous is that it has the ability back up its words with action.

Keep a close watch on China dear reader. It could make all the difference in your portfolio.

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...