While the latest economic data highlights modest recovery in activities & retail sales, the 618 shopping festival result suggests overall consumption sentiment was still cautious. We believe the “dynamic zero Covid-19” policy & soft employment market are likely to weigh on consumer spending. Together with a sluggish property market, which would lead to weak asset value, this is likely to drag disposable income growth.
Despite these near-term challenges, there could be an inflection point in 2H 2022 & in early 2023 with
a more favourable YoY comparison, further pick-up in economic activity and improvement in the labour market. In addition, consumer demand remains strong for high quality products & premiumisation trend continues despite macro uncertainty. As such, market leaders have been demonstrating more resilience & continuing to invest for market share gains in the current challenging environment.
In our view, April 2022 should have seen the worst in terms of consumer spending & retail sales. We
expect 2H 2022 consumption recovery trend will be modest and bumpy. We are positive on consumption upgrade as a long-term structural trend. We view consumption as a proxy to position China’s late cycle recovery with upside from targeted supportive policies, such as, household subsidy, consumption vouchers, & tax cut or subsidies. Overall, we prefer companies with the ability to gain market share, command pricing power, & have flexible cost structures.
For consumer staples, we are positive on the dairy sub-sector. Its demand has been more resilient &
raw material costs are relatively more stable than other consumer sub-sectors. In consumer discretionary, autos is set to benefit from supportive government policy. Following a quick rebound in share price of autos over the past month, we believe tactical investors could consider taking partial profits and fresh positions will need to be increasingly tactical in their positioning given potential for profit taking pressures. We are selective in sportswear as we expect sales data will remain volatile in the near-term & therefore expect share price volatility in the upcoming interim reporting season. We expect eCommerce platforms to benefit from normalisation of regulatory environment in favor of healthy compliant platforms with sustainable growth. We are more tentative on beer (owing to Covid-19 lockdown uncertainties & margin pressure) &, leisure and travel related plays (as the “dynamic zero Covid-19” policy will stay till the 20th Party Congress in 4Q 2022). (Research Team)