China’s urban middle-class population alone, if considered as a country, is larger than the entire US total population today.

The pace of change has been extraordinary. As recently as 2000, only 4 percent of urban households in China were middle class; by 2012, that share had soared to over two-thirds.

An estimate by researchers at the School of International Service at the American University puts the number of China’s middle class at 630 million by 2022–that’s three-quarters of urban Chinese households and 45 percent of the entire population.

The rise of the middle class is essentially an urban phenomenon. Average per-capita urban income in China is roughly triple that in the countryside, and there are set to be 170 million new urbanites between now and 2022.

By 2022 China’s middle class will be consuming goods and services valued at USD3.4 trillion, approximately 24 percent of gross domestic product (GDP).

Research by McKinsey & Company suggests that more than 75 percent of China’s urban consumers will earn RMB60,000 to RMB229,000 (USD9,000 to USD34,000) per year by 2022.

In purchasing-power-parity terms that range is between the average income of Brazil and Italy. Just 4 percent of urban Chinese households were within it in 2000, but 68 percent were in 2012.

In the decade ahead, the middle class’s continued expansion will be powered by labor-market and policy initiatives that push wages up, financial reforms that stimulate employment and income growth, and the rising role of private enterprise, which should encourage productivity and help more income accrue to households.

Should all this play out as expected urban-household income will at least double over the next 10 years.

And that has significant implications for spending habits, with positive impacts on Australia-based companies involved in travel, leisure, food, education and health care.

Over the past year one in 10 of China’s urban upper middle class made at least one trip overseas, and this share is rising rapidly. This international perspective reflects a number of factors. Upper middle-class citizens are better educated and more likely to be able to speak a foreign language – 34 percent of them have a bachelor’s degree or above, and 26 percent can speak and understand English.

The emergence of a new generation of middle-class consumers born after the mid-1980s is also notable. Their parents lived through many years of a shortage economy and are primarily concerned about building economic security for their families. But members of what’s now being called “Generation 2” were born and raised in relative material abundance.

By 2020 35 percent of all consumption in China will likely come from these young consumers, who will be major purchasers of leisure, personal services, travel and high-end hospitality.

A third driver to watch is the increasing consumption of services in China. The service sector is expected to account for half of China’s GDP in 2022, up from 44 percent today. This partly reflects the increasing willingness of China’s upper middle classes to spend on things such as travel; food; entertainment and leisure; education; and health care.

Consumption in these sectors–domestically and abroad–is growing rapidly.

The Gateway to Australia

For the five years from Nov. 14, 2008, through Nov. 15, 2013, Sydney Airport’s (ASX: SYD, OTC: SYDDF) Australian Securities Exchange (ASX) has generated a total return in US dollar terms of 492.6 percent. The return for its US over-the-counter (OTC) listing for the same period is 570.5 percent.

Sydney Airport’s fiscal year corresponds with the calendar year. Since 2009 it’s paid a consistent regular annual dividend of AUD0.21 per share, with a special dividend of AUD0.125 per share paid in 2010 and return of capital payment of AUD0.80 per share paid in 2011.

Even after the strong run at current levels Sydney Airport is yielding a solid 5.3 percent.

With a passenger throughput of approximately 36.9 million, it’s Australia’s largest airport.

And it’s quite literally Australia’s primary gateway with China.

Close to 400,000 Chinese residents visited Sydney during fiscal 2013. Chinese passengers are consistently Sydney Airport’s fastest-growing passenger group, with annual growth averaging almost 14 percent over the past four years. It’s now the airport’s second-largest international passenger group, trailing only close neighbor New Zealand.

Four Chinese carriers–China Southern, China Eastern, Air China and Sichuan Airlines–compete on the China-Australia route, offering a combined 19,540 one-way seats per week. The route has been steadily growing and will reach a new capacity record this month when it reaches 25,189, driven largely by China Southern adding 3,491 seats.

Financial and operating results in the 21st century evidence long-term resilience supported by strong growth in passenger numbers. This traffic growth has been driven to a large degree by Chinese tourism.

Management reported international passenger growth of 3.7 percent over the prior corresponding period during September 2013, driven once again by traffic from Greater China. Passengers from Mainland China grew by 28 percent, from Taiwan by 27 percent and from Hong Kong by 23 percent.

Sydney Airport hasn’t suffered the significant economic shocks that many international peers have in recent years. Its total traffic has increased steadily during the period, as opposed to declines for other airports.

Unlike some large peer airports in Europe and US, Sydney Airport’s pricing is subject to a less rigorous regulatory framework, as it negotiates commercial agreements directly with airline customers. There is, however, some revenue risk based on the generally weak financial profiles of most of the airline carriers.

In recent years management has taken advantage of favorable market conditions to extend maturities and reduce interest costs on its large debt burden.

It does have a total of AUD1.65 billion coming due over 2014 and 2015. But management has a proven record of successfully managing refinancing well in advance. And the airport has significant undrawn bank facilities, although some of these are expected to be used to fund capital expenditures.

Based on its solid record of growth through a challenging period for the global economy and its strong position in the China-Australia bilateral relationship, Sydney Airport is now a buy up to USD4 on the ASX using the symbol SYD and on the US OTC market using the symbol SYDDF.

Asia’s Appetites

GrainCorp Ltd (ASX: GNC, OTC: GRCLF) is the largest grain handler on Australia’s East Coast. As such it is a key player in the satisfaction of China’s and the rest of emerging Asia’s maturing appetites.

As its takeover by US-based Archer Daniels Midland Co (NYSE: ADM) appears increasingly in doubt (see Portfolio Update), the key for GrainCorp’s long-run ability to prosper from this vast export potential is the Australian government’s commitment to improving domestic infrastructure, particularly rail.

China is on track to become the biggest buyer of Australia’s wheat, surpassing Indonesia and South Korea. More than 2 million metric tons from the current year’s yet-to-be-harvested crop had already been sold to Chinese buyers.

GrainCorp CEO Alison Watkins has said that growing Chinese demand is an early sign of the “huge demand: to come from Asian customers but has also warned that Australia needs to invest to ensure it remains cost-competitive.

Over the next five years demand from Southeast Asia–not just China–is forecast to increase by 11 million metric tons. The question is, where is that wheat going to come from?

GrainCorp estimates Australia’s proximity to Asia delivers it a freight advantage worth about USD10 per metric ton of grain. Australia has a significant ocean freight advantage to service Asia, but it’s critical that investment is made to keep the costs of other parts of the supply chain down. The risk of inaction is that the cost advantage disappears.

Under-investment in railways is already forcing more grain to be transported to ports by truck. Australian rail productivity substantially lags that of Canada and other major competitor nations. It takes 18 trains to load the average export vessel compared to about 900 truck trips.

As we note in this month’s Portfolio Update, GrainCorp is now trading at a 52-week low on a report that Prime Minister Tony Abbott will reject the ADM deal. The stock is now yielding more than more than 5 percent.

This presents a new opportunity to own a company strategically placed to help Australia serve the growing appetites of Chinese and other Asian consumers.

GrainCorp is a charter member of the Australian Edge Portfolio, one of the original “Eight Income Wonders from Down Under.” We identified it in the early days of preparation to launch AE because it’s a high-quality company with easily identifiable cash flows.

The Australian government, should it reject the ADM deal, would almost necessarily have to listen to entreaties from Ms. Watkins regarding upgrades to and expansion of the state-owned rail networks that will facilitate GrainCorp’s and Australian farmers’ trade with China and Greater Asia.

And if the deal is approved, from here to the AUD12.20 per share offer price–plus the AUD1 per share dividend ADM added as a kicker–the upside is very attractive. GrainCorp is a buy under USD11.50.

Place Your Bets

Crown Resorts Ltd (ASX: CWN, OTC: CWLDF, ADR: CWLDY) is well placed to benefit from not only a revival of consumer sentiment in Australia but the emergence of middle class in China as well.

Crown operates and manages gaming and entertainment facilities, bars, restaurants, nightclubs cinemas and retail outlets. It also develops hotels and conference facilities. Crown’s assets in Melbourne and Perth continue to deliver solid and relatively defensive earnings. These assets are the company’s main cash flow generators, and there is some concentration risk.

Crown’s 33.7 percent stake in Macau-based Melco Crown Entertainment Ltd (Hong Kong: 6883, NSDQ: MPEL) represents a growth opportunity, and future dividend flows from Melco Crown will bring some diversification.

Macau is one of the two Special Administrative Regions of the People’s Republic of China, the other being Hong Kong. It’s on the western side of the Pearl River Delta, across from Hong Kong to the east, bordered by Guangdong Province to the north and facing the South China Sea to the east and south.

Over 100,000 Mainland Chinese gamble every day in 44 Macau casinos, and the number of visits is growing 10 percent to 20 percent per year. China’s broadening affluence and improved infrastructure allow people who’ve never before had either the money or the access to go to Macau via high-speed rail links.

The size of the average bet is also climbing, from just over USD50 in 2012 to approximately USD120 as of September 2013, driving 30 percent to 40 percent revenue growth. The average bet in Las Vegas, by comparison, has been between USD10 and USD20 for the past five years.

We’re adding Crown Resorts to the AE Portfolio Aggressive Holdings based on its solid cash flow from Australia and the long-term potential of its opportunity to serve Asia’s rapidly emerging middle class.

Crown’s Australian properties also stand to benefit from China’s rising prosperity, as 110,100 Chinese visited the Land Down Under in February 2013, more than double the 42,600 who arrived in all of 1995. And China is now the No. 1 source of tourism revenue for Australia.

Crown Resorts is a buy up to USD16.50 on the Australian Securities Exchange (ASX) using the symbol CWN and on the US over-the-counter (OTC) market using the symbol CWLDF.

Crown Resorts also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol CWLDY. Crown Resorts’ ADR, which is worth two ordinary, ASX-listed shares, is also a buy under USD33.

See this November Sector Spotlight for more on Crown Resorts.

Global Education

A big part of the growth story for Australia-based global education services provider Navitas Ltd (ASX: NVT, OTC: NVTZF) is the US.

Navitas’ education programs in its base country are certainly attractive to middle-class Chinese parents. But the US ranks even higher than Australia in terms of where Chinese want to send their children to school.

Demand for international education continues to grow, with the number of students enrolled outside their country of citizenship rising from 2.1 million worldwide in 2000 to 4.3 million in 2011. This is largely due to the growing wealth of the middle class in developing countries such as China and shortfalls in institutions of higher learning in these regions.

Demand is projected to keep growing well into the future with key Navitas locations such as the US, the UK, Australia and Canada all maintaining significant market share.

Management reported student enrolments of 5,509 equivalent full-time student units (EFTSU) for the third semester of 2013 for its Northern Hemisphere University Programs colleges, an overall increase of 25 percent in EFTSU compared to the prior corresponding period.

Northern Hemisphere colleges include all colleges in the US, the UK and Canada. Management will report student numbers for the Southern Hemisphere colleges, and the full University Programs Division, on Dec. 2, 2013.

US colleges continued their strong growth trend, with enrollments up 45 percent, while Canada grew by 21 percent and the UK by 23 percent.

Navitas has also received notification from the University of Massachusetts that restrictions on recruiting undergraduate students from China were to be officially lifted at Navitas’ three UMass colleges as of Nov. 1, 2013.

This should help boost placements by its EduGlobal unit and lift overall financial results. EduGlobal, one of the largest student recruitment agencies in China, has 23 offices across the Middle Kingdom through which it recruits, counsels and enrolls more than 3,500 students per year at some of the most reputable study institutions in Australia, the US, the UK and Canada.

Navitas reported strong revenue growth across all divisions for the three months ended Sept. 30, 2013, with total revenue up by 15 percent over the prior corresponding period. Management plans significant investment in its recruitment efforts and in its university programs, as it works to maintain the solid momentum in the US, which will boost future earnings but will have a negative impact on fiscal 2014 margins.

Management has guided to fiscal 2014 earnings before interest, taxation, depreciation and amortization (EBITDA) of AUD138 million to AUD148 million; the midpoint of this range represents 10 percent growth compared to AUD130 million for fiscal 2013.

Revenue grew by 6 percent in fiscal 2013 to AUD731.7 million, as EBITDA was up 3 percent. Net profit was up 2 percent to AUD74.6 percent.

That’s solid improvement, though management noted it was also the start of a period of investment in systems, processes and people to better position the company for sustained growth. Navitas paid a full-year dividend of AUD0.195, representing 98.2 percent of earnings. The full-year figure is up 12.3 percent from the fiscal 2008 dividend. Management is gradually moving toward a dividend payout ratio of 80 percent of net profit after tax.

Navitas is a buy up to USD6 on the Australian Securities Exchange (ASX) using the symbol NVT and on the US over-the-counter (OTC) market using the symbol NVTZF.

Health Tourism

Ramsay Health Care Ltd’s (ASX: RHC, OTC: RMSYF) joint venture in Malaysia, Ramsay Sime Darby Health Care, plans to expand its hospital network to at least 12 in the next three to five years.

Ramsay Sime Darby currently has three Malaysian hospitals from Sime Darby Healthcare and three in Indonesia from Ramsay.

The expansion plan extends beyond Malaysia and Indonesia initially, with eyes on Vietnam and China. As is the case with Ramsay Health Care, expansion will be based on greenfield as well as brownfield hospitals.

Management of the JV has identified opportunities in China and met with operators. But it can’t proceed without local partners. The process of establishing a presence in the Middle Kingdom will be a slow one.

But guiding Ramsay Sime Darby’s Asia growth plan is the emerging middle class in China and the broader region.

International patients–including expatriates, travelers and a few medical tourists–make up of 6 percent of total patients in Ramsay Sime Darby’s Malaysian operations. The group hopes to increase the international patient numbers to 10 percent in Malaysia within two to three years.

Health tourism is a potential source of growth, as Malaysian Prime Minister Seri Najib Tun Razak has expressed a desire to turn the country into a regional healthcare hub.

Over the past three years Malaysia has seen more than 20 percent growth in health tourism and generated almost MYR600 million of revenue in 2012. The Malaysian Healthcare Travel Council (MHTC) has done extensive work to boost the country’s technology platform and provide web-based medical and health-related information for a global audience.

The MHTC forecast that 700,000 medical tourists will travel to Malaysia in 2013, up from 392,000 in 2010, 538,000 in 2011 and 671,000 in 2012.