11 China Stocks with Wide Moats

Investing in stocks with a competitive advantage, often referred to as a "moat," is a fundamental concept closely associated with Warren Buffett. It is indeed an important consideration for a long-term investor because competition is guaranteed and a business must be able to grow and protect its market share against rivals. Otherwise, the business will shrink and so would the investment value.

Morningstar has a longstanding reputation for evaluating and rating moats. I was curious which Chinese stocks would meet their criteria.

Upon a review of Morningstar's ratings, it became apparent that many Chinese stocks are not covered by Morningstar, and a smaller number of them are considered to have moats, especially when compared to their American counterparts.

Nevertheless, I was able to identify 11 such stocks within the top 100 Chinese companies by market capitalization.

I observed that most of these stocks fall into two primary categories. Firstly, there are the Chinese tech giants, including Tencent, Alibaba, JD.com, and Baidu. Secondly, there is the "baijiu gang," consisting of Moutai, Wuliangye, Luzhou Laojiao, and Yanghe. Excluding these eight stocks, we are left with only three other stocks, which you might be less familiar with.

I will provide a brief overview of each of these remaining stocks, along with a concise write up of their moats.

#1 Haitian (SSE:603288)

Haitian is known for soy sauce. While it may appear unexciting, it plays an indispensable role in Chinese cuisine, serving as both a cooking ingredient and a dipping sauce consumed with every meal. Soy sauce is a culinary essential for the Chinese population.

Haitian has diversified its product offerings into various condiments, including oyster sauce, recipe sauce, and pickled products. These supplementary products are currently propelling the company's growth, and Haitian has the potential to continually introduce new items to boost its revenues.

Haitian's competitive advantage stems from its robust brand recognition, an extensive distribution network, and the advantages of economies of scale. The company has achieved full coverage in all prefecture-level cities and nearly 90% coverage in county-level cities across China. In contrast, competitors like Jonjee and Hengshun lag behind with less than 60% coverage in county-level cities.

Haitian dominates the market for soy sauce and oyster sauce, with its market share being more than twice that of its closest competitor.

Leveraging its size, Haitian has effectively managed to achieve a combined cost per ton of ¥527, in stark contrast to ¥775 and ¥708 for Qianhe and Jonjee, respectively. Moreover, Haitian maintains a notably lower sales and marketing expenses ratio compared to its peers, with a margin advantage ranging from 8 to 15 percentage points. This advantage can be attributed to Haitian's substantial revenue base.

Haitian's share price currently trades below Morningstar's fair value estimate of ¥51.