As China prepares to bury part of the trade-war hatchet with the United States by on Wednesday agreeing to buy more U.S. farm goods, we shouldn't forget that China has a variety of other disputes in Asia. Most notably, it has chilly relations with its North Asia neighbors Japan and South Korea.
China is also becoming better buds with those regional rivals. That's partly because Beijing faces a tough task in hitting its own targets for economic growth, likely to be set in March at around 6.0% for this year.
China cut off tourism to South Korea in 2017, after Seoul agreed to house a U.S. missile-defense program on its soil. China appears to be relenting on that restriction heading into 2020.
As of the start of the year, Chinese travel agencies have been selling 5-6 day packages to South Korea. Although there's been no official announcement of any reversal of the ban, that's the way Beijing operates. The ban wasn't publically announced when it was put in place.
Airlines also report that passenger numbers out of China to Korea have picked up substantially heading into the new year. This resumption of travel -- China is the key source of travelers to South Korea -- should provide a boost to tourism- and consumer-related stocks.
Most Korean stocks are listed only on the Seoul market. For U.S. investors, they may want to look at skin-care and bathroom-products manufacturer LG Household & Health Care (LGHHF) as a way to play any rebound in China spending.
Investors with access to Seoul stocks could also look at Hotel Shilla KR:008770, which operates not only luxury hotels but also a string of duty-free shops.
The cosmetics maker Amorepacific KR:090430 should get a boost. So, too, should department-store operator Shinsegae KR:004170.
Nomura calculates that Chinese tourists will spend on average $944 per person on trips to Taiwan. Chinese resellers also abound, who stock up on a massive scale with goods to re-sell in China. They average around $3,000 per person per trip if operating on this basis professionally.
Nomura anticipates that around 2 million Chinese tourists will visit South Korea this year as the ban lifts. A lot of those trips are essentially for shopping, particularly for consumer goods such as cosmetics, where Korea is a world-leader.
The visitor-number forecasts may well be conservative considering that Chinese travel to South Korea peaked at 8 million in 2016. Then again, Beijing allowed short-term windows of increased travel into Korea in 2018 and 2019, only to reverse that thaw when relations turned frosty with Seoul again.
The Japanese investment bank sent its consumer analyst Cara Song to a duty-free store in Myeongdong, and the staff tell her that Chinese resellers have resumed their trips to Seoul. These "parallel traders" buy goods in other countries, sometimes to-order for specific customers, and return to China to re-sell or deliver them, to get around hefty Chinese tariffs on luxury and consumer-discretionary goods.
Nomura has increased its forecast for the growth in duty-free sales in South Korea. It had previously anticipated 15% year-on-year growth, but thanks to the resumption of China travel has revised that 22%. It has lowered its anticipated growth in reseller traffic to 10%, down from 15%, since greater individual travel will cut into the need for those trips. But the investment bank says there's "upside risk" if individual travel and reseller traffic both outperform.
Nomura anticipates that Hotel Shilla shares could have a 30% upside in price if duty-free sales increase. With its duty-free stores and hotels, it's a pure-play tourism stock, the duty-free portion contributing 93% of operating profit at the moment.
Shinsegae operates department stores that depend mainly on domestic sales. The duty-free portion contributes 22% of operating profit, making Shilla far more direct as a play on China travel.
LG Household & Health Care (21x 2020 earnings) trades at a more-attractive valuation than Amorepacific (35x 2020 earnings). It's actually being weighed down by its newly acquired New Avon subsidiary in the United States, an Avon business it bought in August for $125 million. It also suffers slow sales at its luxury brand SU:M. Nomura figures the stronger Chinese tourist traffic should more than make up for those headwinds.
Although Beijing-Seoul relations are softening, tensions remain taught with Taiwan. Incumbent President Tsai Ing-wen won re-election on Saturday by a sizable margin. That was expected, but most political analysts view the result as a vote of confidence in her arms-length approach to the mainland.
Beijing has since Tsai took office in 2016 scaled back on its incentives designed to encourage business ties between China and Taiwan. In July 2019, it cut off individual travel by mainland citizens to Taiwan, which has dealt a severe blow to the hotel and tourism industries. Chinese people from 47 cities had previously been able to apply to make self-organized trips to Taiwan.
Major Chinese tour groups had already scaled back any promotion of trips to Taiwan, likely thanks to a quiet directive from Beijing.
For the foreseeable future, there's no way Taiwan will accept the "One Country, Two Systems" charade that passes for autonomy in Hong Kong. They should not. It would be the end of Taiwan's independence.
Instead, some observers believe Tsai will take greater steps toward ensuring Taiwan, which operates as its own nation in every sense, is recognized as such by the world's diplomatic community. It may shelve its confusing insistence on being called the Republic of China, and push for formal recognition as Taiwan.
So, while Korean consumer-discretionary stocks are the play going into 2020, don't expect any similar boost to their Taiwanese counterparts anytime soon.