Head To Head: Is Unilever plc Or ARM Holdings plc The Better Play On A Booming China?

Do you know what most impresses me about China? Actually, it more than impresses me — it frightens me a little.

It is momentum. This was a communist state which, in the 1980s, was a predominantly farming economy. Yet it turned from far left socialism to embracing capitalism. And I think it worked rather well.

Yes, the stockmarkets in China, and around the world, are suffering from a sort of malaise. But China certainly isn’t. An annualised growth rate of 6.9% is mightily impressive. But, the question is, what FTSE 100 companies would you invest in to take advantage of this boom? Well, here are two of my picks.


Take a chart of the Hang Seng index. Then take a chart of the share price of Unilever (LSE: ULVR). If you compare them, you will be hard-pushed to see the difference.

And it is not difficult to explain this. Because the fortunes of Unilever, and other similar consumer goods companies, is inextricably linked with China. A burgeoning middle class of consumers in this country now makes up one of this firm’s biggest markets, and one that is growing faster than any other.

And Unilever has placed all its blue chips on China. Much of its research and marketing investment is focussed on emerging markets, and this is already paying dividends.

This company is set to make a whopping five and a half billion pounds profit this year. And an increasing proportion is made from emerging markets.

No wonder the share price has been rising so quickly. The predicted 2015 P/E ratio is 22.18, falling to 21.22 in 2016, with a dividend yield of 2.99%, rising to 3.13%. That means the firm is not cheap, but I still think it is worth buying into.


So how can ARM Holdings (LSE: ARM) be an emerging market stock? What on earth has it got to do with China? Well, as it happens, quite a lot. Because ARM designs the processor chips that go into every iPhone and every iPad in the world.

And which is Apple’s fastest growing market? Well, China, of course. The low power consumption, small size and ultra-fast processing speed of ARM’s reduced instruction set chips make them ideally suited to smart phones and tablets, and ARM cleverly concentrates on the most complex part of the chip making process: not the manufacture or assembly, but the design.

Chinese consumers love iconic brands, and Tim Cook has cleverly focussed the Apple’s resources on growing the China market. Which means that iPhones, and the ARM chips that run them, have been flying off retailers’ shelves from Beijing to Tianjin.

ARM’s recent results show that it is still growing earnings fast, and I think this justifies the company’s high rating. A forecast 2015 P/E ratio of 33.96 falls to 29.29 in 2016, with a dividend yield of 0.66% falling to 0.63%.

Foolish bottom line

I think both these businesses are worth buying into. However, I suspect the consumer goods industry has the more predictable long-term earnings, and Unilever’s income makes it appealing as both a dividend and growth investment. Thus, Unilever just edges it for me.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.