Hong Kong: Chinese consumer stocks are in the crosshairs of Hong Kong’s short-sellers.

Bearish bets on Tingyi (Cayman Islands) Holding Corp and Want Want China Holdings Ltd soared to record highs since May, data compiled by IHS Markit Ltd show. The instant noodles and snacks manufacturers, together with sanitary-napkin maker Hengan International Ltd, make up three of the four most-shorted stocks on Hong Kong’s benchmark index. Hengan this month spun off its food business into a separately listed unit that’s down 27 per cent from its first close.

Bears are betting that China’s shift toward an economy driven by middle-class spending will leave some consumer stalwarts behind. Even after valuations on Tingyi and Want Want fell to all-time lows at the start of the year, the stocks are still too expensive as internet retailing helps foreign brands grab market share in China, according to Ample Capital Ltd. Shoppers are showing a preference for healthier food, UOB Kay Hian Holdings Ltd says.

“Consumers have been changing their pattern to more nutritional products so their business growth is declining,” said Johnson Hu, a Shanghai-based analyst at UOB Kay Hian. “We don’t see that changing in the foreseeable future.”

Short interest in Want Want and Tingyi has risen to 7.6 per cent and 4.9 per cent of their outstanding shares as of Tuesday, Markit data show. Bearish bets in Tingyi surged to a record level this month, and those in Want Want are close to all-time highs last seen in May. The average of similar wagers for the 50 Hang Seng Index members was about 1.3 per cent.

Gas distributor Kunlun Energy Co had the second-most bearish bets on the Hang Seng Index, at 5.3 per cent, after shorts jumped over the past week, the data show.

Tingyi and Hengan declined to comment, while officials at Want Want didn’t immediately respond to queries from Bloomberg.

Economic transition

Food and beverages with low levels of fat or sugar are becoming more popular as China grapples with increasing cases of obesity, according to Euromonitor International.

It isn’t just the growing health awareness among the relatively affluent that may be affecting sales. Adrian Mowat, the chief Asian and emerging-market equity strategist at JPMorgan Chase & Co, says a fall in workers’ overtime payments may have contributed to a drop in demand for noodles.

China’s attempt to steer the economy away from an investment-led model to one fuelled by consumption has raised the prospect of job losses in industries including coal and steel. The rapid wage gains that began in the country after the 2008-2009 financial crisis have begun to fade as the economy slows, and could mount challenges for officials trying to boost consumption, a Bloomberg survey of economists showed in March.

As the economic transition unfolds, “half of China is becoming sophisticated and trying new things whereas the other half is being left shortchanged,” according to Jeremy Yeo, an analyst at Mizuho Securities Asia Ltd.

Stock valuations

Tingyi shares have plunged 36 per cent in 2016, and Want Want 12 per cent, with both poised for a third annual loss after sales peaked in 2013. They have also posted declines in earnings for at least two years, and are expected to report their first-half results next month. The consumer-staples gauge on China’s CSI 300 Index, by comparison, has gained 8.4 per cent this year, set for a third annual increase.

Hengan, which makes sanitary napkins and diapers, has dropped 7.3 per cent in 2016, also on course for a third yearly loss. The foods division it spun off into a separate firm, Qinqin Foodstuffs Group (Cayman) Co, slumped 29 per cent on July 11, its second day of trading.

Tingyi is valued at more than 20 times in projected 12-month earnings, compared with about 18 times for Hengan and nearly 15 times for Want Want. The Hang Seng Index, which entered a bull market on Thursday, trades at a multiple of almost 12.

“I think the reason the short position has been high is that people have viewed these stocks as being valued as defensive growth bets, and they haven’t been delivering,” JPMorgan’s Mowat said.

Foreign competition

The situation isn’t all gloomy, though. Sunny Kwok, an analyst at Guotai Junan International Ltd, says a decline in milk powder prices on the mainland should help improve Want Want’s profit margins on its milk products, which bring in about half its revenue.

Tingyi, which is adjusting its business strategy after a price increase last year cost the company market share, may take some time to recover its profitability, he said.

Both companies will in 2016 halt a drop in sales after two years of declines, estimates compiled by Bloomberg show.

Increased competition remains a challenge. Chinese e-commerce companies such as JD.com and Alibaba.com are improving the access consumers have to foreign brands, threatening domestic incumbents, according to Alex Wong, who helps oversee about $100 million (Dh367.3 million) at Ample Capital.

“People are expecting them to lose market share against foreign competitors,” said Wong. “The bears have very sufficient grounds to be bearish.”