What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing in today's video. We're talking about the luxury goods industry in china, specifically we'll be focusing on president xi's new common prosperity agenda, which seeks to curb excessive wealth in the country. Obviously, this could have a huge impact on the global luxury brands which generate a substantial part of their revenue from the country. The global luxury goods market is worth 300 billion dollars per year and china makes up roughly 50 percent of it.

If china cracks down on foreign luxury companies or luxury consumption in general, the repercussions could be huge in this video we'll go over why china is so important to the global luxury industry and what will be the implications of president xi's common prosperity agenda? First off. We have to establish how big the luxury sector is and how important it is to many european economies. If you look at the world's top 10 richest people, you might not be surprised to see that is dominated by the us tech founders, such as jeff, bezos of amazon and elon musk of tesla, but the world's third richest man does not fit this description. Bernard arnault, the ceo of french luxury conglomerate lvmh, has an estimated net worth of 150 billion dollars, putting him ahead of the likes of bill gates, mark zuckerberg and warren buffett and, interestingly, his wealth, more than doubled from 76 billion dollars.

One year ago, this was driven by the strong stock price performance of lvmh and luxury stocks in general, which have massively outperformed the market indices. In recent years. This outperformance has accelerated in 2021, with lvmh sitting at 58 above its pre-covered levels. Most popular luxury brands have been around for decades, if not centuries.

If you walk into a louis vuitton factory, you won't see any robots or advanced technology. You will instead see artisans meticulously making products by hand in small quantities, just like they've been doing for the past hundred years, while while they do take skill and decades of experience, it's hardly rocket science and there's little room for process improvement. These companies are hardly innovative, but nevertheless their stock prices have risen exponentially over the past decade, as it turns out, luxury goods makers can attribute their astounding success almost entirely to one country, china. The chart on the left shows lvmh's revenue growth from 2006 through 2021..

Lvmh is the massive french luxury conglomerate behind louis vuitton, dior, fendi and other top tier brands. The red area represents their revenue contribution from asia, excluding japan, which for practical purposes, basically means china. China represented 17 percent of total sales in 2017.. Chinese sales have grown at a 15 annual growth rate since then, and now make up 38 of their total sales.

The rest of the world, excluding china, has grown just seven percent less than half that of china. In fact, these numbers actually understate the importance of china as a significant portion of european and north american sales. Come from chinese tourists. Visiting cities such as new york and paris.

The out performance has accelerated in 2021, with chinese sales on track to far exceed 2019 levels, while the rest of the world has also made a comeback from the kovid pandemic, they are currently on track to spend slightly less in 2021 than they did in 2019.. Lvmh is the biggest example, but all luxury brands have similarly relied on china to drive the majority of their revenue growth over the past decade. By some estimates, china makes up close to 50 of the 300 billion global luxury goods industry, as china has developed over the past couple decades, a larger and larger proportion of the population can afford to spend a thousand dollars on a louis vuitton bag. When people achieve success in their professional careers, the easiest way to convey their position as a winner is through the consumption of luxury goods.

This desire has been amplified by social media. It is not uncommon for people with modest incomes to spend multiple months worth of wages. On luxury items, this has led to a situation where china punches well above its weight in the terms of luxury consumption, while their economy is slightly smaller than that of the us, they spend close to 50 more on luxury brands. It's fair to say that china is the main reason that luxury stocks have been able to make the parabolic moves to the upside that we've seen in recent years and with hermes trading at more than 60 times price to earnings.

The market is pricing in an optimistic future where china continues its strong growth for many years to come, but recent developments by the chinese government cast a grave shadow on luxury consumption in the country in august of 2021, president xi jinping said the government would aim to Regulate excessively high incomes and redistribute wealth to lower income groups as part of their broad-based common prosperity agenda. This announcement caused european luxury stocks to quickly dip close to 10 percent, but they have since regained most of those losses. The government hasn't laid out any specific actions targeting the luxury industry, but with luxury goods being perhaps the most obvious display of excessive wealth. It's certainly within the realm of possibility that they could take some action, and if the government believes a given industry goes against their policy objectives, they have proven they are willing to take extreme action, such as completely banning for-profit education.

Private education companies were banned because they are perceived as contributing to the educational rat race and charging exorbitant prices to working-class families. One could also make an argument that luxury goods create a societal rat race where people feel they have to spend large proportions of their incomes. On luxury goods, while it would seem extreme for china to completely ban luxury goods, it also seemed extreme to ban private education, and it appears that the government has recently become keenly interested in regulating various cultural excesses. In september of this year, the government directed social media giant weibo to suspend fan accounts to various k-pop celebrities, some of which had millions of followers.

These bans came shortly after a fan account for bts star g-min, raised money to charter an airline flight for celebration of his birthday. This likely cost millions of dollars, as they customized the airplane's, exterior to display a picture of the 26 year old while not technically illegal. The government views these extreme social media fan clubs as detrimental to china's culture and fear that young people spend excessively in support of celebrity idols. The korea jung ang daily recently interviewed chinese history professor park jung-suk about the chinese government's motivations for this social media crackdown.

He says that while the chinese communist party is willing to allow some foreign cultural influences, when they see things getting out of hand, they will reign things in through regulation. K-Pop is a huge industry in south korea, with the bts band alone, estimated to contribute billions of dollars to their economy every year with 1.2 billion people, china is their biggest export market. By far, the chinese government probably doesn't like the idea of foreign celebrities extracting billions of dollars from the country's impressionable youth. This is why they are cracking down on k-pop.

European luxury brands have a lot of similarities to south korean k-pop brands, they're foreign companies that extract tens of billions of dollars worth of profits from china every year. Many working-class people save multiple months worth of salary to buy luxury items, so they can keep up with their friends on social media. This is obviously not in line with the common prosperity agenda, while an outright ban on foreign luxury goods seems implausible. The chinese government has shown time and time again that they are capable of just about anything.

Nobody saw the private education ban coming in february when tau education was trading at all-time highs, even if there are no official bans. If the state-run media starts criticizing conspicuous consumption, people may voluntarily hold back on their luxury spending to avoid social stigma. While the government has not yet announced any actions against luxury companies, there appears to be a significant risk, as their business model of high prices and exclusivity contradict the tenants of common prosperity, and with these stocks trading at or near all-time highs, the risk reward profile looks Unfavorable, in our opinion, it is said that you can't fight town hall. This is especially true in china, with the government being so powerful.

If you want exposure to the chinese economy, we think it's important to invest in companies that align with policymakers goals of economic development. While this video is not financial advice, we prefer companies like alibaba, which supports millions of small businesses in the country and contributes significantly to technological innovation. Alright, guys that wraps it up for this video. Do you think the chinese government will target luxury stocks as part of their common prosperity agenda? Do you think luxury stocks valuations are justified, given the potential risks? Let us know in the comments section below, if you enjoy this content, make sure to smash the like button and subscribe.

So you don't miss future uploads as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.