A lot is written in the business media and by professional investors about investing themes or tailwinds that you can profit from. One of the most popular is the economic rise of China and the spending power of its middle class, which is no surprise given it has a population close to 1.4 billion people.
Some investors claim the way to profit from China is to buy Australian foodstuffs exporters like Bellamy’s Australia Ltd (ASX: BAL), Treasury Wine Estates Ltd (ASX: TWE) or Blackmores Limited (ASX: BKL). However, these companies are vulnerable to changing Chinese regulations or consumer demand.
A better bet to profit from the rise of the Chinese consumer is probably to look at a piece of infrastructure Chinese tourists are moving through in fast rising numbers.
Sydney Airport Holdings Pty Ltd (ASX: SYD) now sees more Chinese passengers travel through it every year than New Zealanders.
In fact no overseas country has more passengers travelling through the airport than China, with arrival numbers up 4.2% for the year to September 2018.
For the six months ending June 30 2018, 44,000 more Chinese passengers went through the airport compared to the prior half-year period as more routes open up to and from mainland China.
The airport earns more fees the more passengers it has travelling through it, with India being flagged as another big growth market, given Indian passenger growth soared 17% in the six months ending June 30, 2018. However, Indian passenger growth is coming off a much lower base.
Sydney Airport should continue to benefit from these long-term trends of emerging market visitor arrivals from across Asia, with plans to expand or improve operations and capacity at all three terminals.
Sydney Airport is also a monopoly in that airlines and passengers have no choice but to use it in Sydney, which gives it some defensive revenues and a solid long-term outlook for growth. Plans are underway to build a second airport in Sydney, but this is not likely to impact the main airport’s long-term performance.
Over 2018 the group is aiming to distribute 37.5 cents per shares in dividends, up 8.7% on the prior year, which places it on a yield of 5.7% with shares changing hands for $6.58 today. In 2012 the dividend was just 21 cents per share, which goes to show the rapid growth of a business that is often labelled a bond proxy.
It does carry risks in this sense with debt at $8.3 billion on 6.7x EBITDA, the Airport is highly leveraged and vulnerable to sharp lifts in the cost of interest payments. If there were a big global economic downturn that hurt passenger numbers or some other act of terror that had the same effect, then the airport’s share price could plunge quickly.
Therefore it should only make up a small proportion of a balanced investment portfolio.
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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Blackmores Limited, Sydney Airport Holdings Limited, and Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.