Lower margin pressure expected in FY22F

■ We hosted China Consumption Virtual Corporate Day and invited 22 companies.
■ We expect lower margin pressure for consumer staples in FY22F, owing to price hikes and cost pressure moderation.
■ 3Q21 domestic consumption was impacted by Covid volatility. Companies saw some recovery in Oct/Nov and expect further recovery in 1Q22F. Companies also saw no change in the premiumization trend.
■ Tourism and discretionary companies will need more time to recover and expect a stronger recovery in 2H22F.
■ There is still short-term policy uncertainty for the e-commerce sector, but we expect the overall policy uncertainty to gradually decrease in FY22F.
■ Our top picks are Moutai, Tsingtao Brewery, Mengniu, Proya, Lining and JD.com.

Less margin pressure expected in FY22F

Cost pressure became more serious in 3Q21 for consumer staples, so a couple of companies raised their selling prices. CRB raised the ex-factory price of its mid-end product, Brave the World Series (勇闯天涯), on 1 Sep 2021. Want Want announced price hikes in the mid to high single digits for 70–80% of its products as of 1 Jan 2022. Tingyi and UPC raised the selling prices of their noodle products. We expect cost pressure to moderate in FY22F. UPC expects cost pressure to start to fall in 2Q22F. Yili and CMD expect raw milk prices to increase in the low single digits yoy in FY22F vs. high single digits yoy in FY21F. We believe all these companies who have raised their selling prices to achieve gross margin expansion in FY22F.

No change in the premiumization trend

Most companies expect the premiumization trend to continue, even under the weak macro conditions. Although beer industry volume growth was flattish yoy in 9M21, CRB can still achieve over 30% yoy growth for mid- to high-end product sales in FY21F. UPC expects its high-end, self -heated food to achieve 50% yoy sales growth in 9M21, and the high-end noodle segment sales contribution improved to 40% in 9M21, from 35% in FY20. 3Q21 domestic consumption was impacted by Covid volatility. The companies saw some recovery in Oct/Nov and expect a further recovery in 1Q22F.

Tourism and discretionary names will take more time to recover

We expect the government to review its travel policy after the Winter Olympics. Huazhu’s Nov Revpar recovered to 70% of that in Nov 2019, and management has seen a further recovery in Dec. 4Q21F Revpar is expected to be 75% of that in 4Q19. Management holds a more positive view of the recovery in 2H22F. Haidilao has closed about 180 stores and will close the remaining 120 stores by end-2021. Haidilao will launch a batch of new products by the end of this year to attract younger customers.

Gradually less policy uncertainty expected for e -commerce sector

Bilibili expects the government to relax the online gaming policy somewhat in the near future. Management guided online gaming segment revenue growth of 20% yoy, up from 9% yoy in 3Q21 and flattish yoy in 1H21. We think it is possible for ADRs to be delisted from the US market, and more companies to dual list in the HK market. But this practice should not theoretically impact the companies’ fundamentals and valuations.

Reiterate Overweight for China’s consumer sector

We expect a further recovery in the consumer sector in FY22F, driven by 1) price hikes, 2) moderating cost pressure, 3) a further relaxation of travel policy to drive the catering and tourism industries, and 4) less policy uncertainty for the e-commerce sector.