China has taken the spotlight lately and GDP growth at its lowest in more than two decades is contributing to the worst January on the stock market  since 1970. The hopes of thousands of companies looking for double-digit Chinese growth to save sluggish developed market sales seems to be falling apart.

But talk of a ‘two-speed economy’ is emerging for the nation of 1.39 billion and there might yet be hope for investors. 

#-ad_banner-#Looking deeper into the data, I’ve found some sectors and industries posting quarterly and annual growth. In fact, annual growth in one industry is forecast at nearly 20% for at least three more years. 

One company is about to capitalize on that growth. It’s not the hyped investment that everyone knows but a smaller rival that may get a big boost from a smaller base as it gets into the China game.

Not All Of China Is Slowing
China’s slowing growth has been an overhang for years but seems to have boiled over on the fourth quarter GDP report. Economic growth in the world’s second largest economy slowed to just 6.8% and finished 2015 at the slowest pace in 25 years. Power generation saw its first decline since 1968 and manufacturing grew by just 6% last quarter.

Against mostly disappointing data, one segment of the economy is surging: The government’s transition to a service economy seems to be working. The services sector in China grew 8.3% in 2014 compared to 7.8% growth for manufacturing in the same year. The services sector now accounts for 51% of the overall economy in China. 

Within services and retail in that country, coffee consumption is booming and expected to rise 18% annually through 2019. Chain retailers like Starbucks (Nasdaq: SBUX) and Costa Coffee have made the morning cup a part of normal daily life for many Chinese workers. 

From about 2000-2010, nearly any bet on China made money. The next decade could be a two-speed economy with only investments in the service sector benefiting from faster growth. While Starbucks is planning an aggressive expansion of 500 new stores annually over the next five years, another coffee competitor may be a stronger bet.

China’s Growing Caffeine Fix
Dunkin Donuts (Nasdaq: DNKN) opened its first China store in 2008 but has not aggressively been expanding in the country, with just 16 stores there as of 2015. The company announced last year that it would partner with Golden Cup Pte. Limited to open 1,400 more over the next 20 years. Golden Cup will operate the restaurants under a franchise agreement.

Starbucks’ China growth may not be as fluid as management forecasts. China State television attacked the company in 2013 for charging more for its coffee than it does in other countries, with prices in Beijing up to a third more expensive than in Chicago. The company was forced to close its Forbidden City restaurant in 2007 after protests started by a state television anchorman. On this history of conflict, Dunkin Donuts may find better growth through its Golden Cup partnership and sales could jump as the company expands from almost no presence. 

Beyond a strong brand in the Dunkin Donuts franchise, the company also owns the Baskin Robbins chain of ice cream restaurants from which it books 19% of total revenue. The company franchises 8,389 restaurants internationally with 69% in Asia, followed by the Middle East (15%), Europe (8%), and Americas and Australia (8%).

And Dunkin Donuts has a strong financial advantage in its franchise model:  100% of the company’s restaurants are franchised, compared to 46% for Starbucks. While the full-franchised model may limit corporate profits from each store, it makes for much more certain cash flows and expenses. DD franchises are very popular with franchise groups, which report an average 20% cash-on-cash return annually and owning an average of eight restaurants. The 100% franchise model basically turns DD into an annuity of royalties, removing heavy capital spending needs and volatility around commodity prices. Free cash flow has grown at an annualized rate of 12.4% over the past five years on 6.2% annual growth in sales.

DD is also planning on adding aggressively to its U.S. store count outside its core region of the Northeast at a rate of about 5% growth each year. More than 8,300 restaurants are franchised in the United States with nearly half in seven states. Despite coffee consumption growth of just 1% to 2% annually, the franchise model ensures cumulative profits from each store addition.

Source: Dunkin Donuts 2015 Investor Presentation

Shares trade for 20 times trailing earnings — well under the 35 times multiple on shares of Starbucks — and a discount of 33% on Dunkin Donuts’ three-year average multiple of 30 times earnings. The market is expecting earnings of $2.19 per share in 2016, an increase of 14.6% on 2015 earnings and on sales growth of 5% for the year. The shares could be worth $45 each, a gain of 18%, just on earnings growth with no multiple expansion. I expect the China story to develop over the next couple of years with strong growth from such a low base and for investor sentiment to improve. 

Risks to Consider: Starbucks and others have the first mover advantage in China, meaning some uncertainty to Dunkin Donuts’ expansion plan as it tries to penetrate the market.

Action to Take: Position in one of the few growth markets in China with shares of Dunkin Donuts on a strong value proposition and an advantage in the franchise model.

Editor’s Note: If you think ObamaCare was big, wait until you see the other industry Obama vows to transform before leaving office. Details here.