Gradual consumption recovery expected in 4Q22F
- China consumer companies reported mixed 1H22 results; baijiu and beer companies had relatively strong results.
- The results of noodle, beverage and tissue companies were below our expectations
- Domestic consumption has shown some recovery since Jun and Jul, but we expect consumption to still be impacted by Covid in 3Q22F and to recover in 4Q22F.
- We expect the consumption polarization to continue to drive the mix upgrade for baijiu and beer, which have strong capability to offset the raw material cost pressure.
- We expect the Covid policy to be further relaxed in 1H23F, which should benefit the recovery of the catering, tourism, sportswear, beer and condiment sectors.
- We reiterate Overweight for China’s consumer sector; our top picks are Moutai, Tsingtao Brewery, Yili, Lining and Proya.
Mixed 1H22 results
Under our consumer coverage, eight companies’ 1H22 results were above expectations, eight were in line, and 10 were below expectations. Baijiu and beer companies reported relatively strong results, with the net profit of Gujing, Laojiao, Yanghe, Fen Wine, Tsingtao and China Resources Beer (CRB) above expectations, due to successful premiumization offsetting raw material cost pressure and effective expenses control. However, noodle, beverage and tissue companies, like Tingyi, UPC, Vinda and Hengan, which are more sensitive to raw material prices, reported lower-than-expected 1H22 earnings. The sportswear sector’s results were also below our expectations, since Covid impacted offline channel sales and demand for outdoor activities.
Gradual recovery expected in 4Q22F
Most consumer companies saw demand recovery in Jun and Jul. Tsingtao and CRB achieved high-single-digit and double-digit yoy sales volume growth in Jul and Aug. But the recent Covid volatility in major tourism cities, like Hainan, Chengdu and Shenzhen, will impact domestic consumption, especially travel and catering demand, in 3Q22. We expect a better recovery in 4Q22 along with the Covid situation improving. We observed a consumption polarization trend due to the weak macro and the Covid impact. On one hand, the premiumization trend for the baijiu and beer sectors is still strong. On the other hand, mass market UHT milk, condiments and noodle products are selling pretty well.
Cost pressure expected to fall hoh, but to remain high in 2H22F
Most soft commodity prices have corrected mom since Jul. For example, palm oil, barley and PET prices fell by 30%, 11.9% and 7.2% mom in Jul. We expect soft commodity cost pressure to fall hoh, but to still remain at a high level in 2H22F, which will continue to put pressure on the GPM of Tingyi, UPC, Hengan and Vinda. We expect the baijiu, beer and dairy players to fully mitigate the cost pressure.
Covid policy may be relaxed further in 1H23F
The National Health Commission published the 9th version of the Covid control plan, which shortened the quarantine length requirements. We expect the government to further relax the Covid policy in 1H next year, which should benefit sectors including catering, tourism, sportswear, condiments and beer.
Reiterate Overweight for the consumer sector
We reiterate our Overweight rating for the consumer sector, due to its expected recovery trend in 2H22F. The MSCI China Consumer Staples Index was down by 24% YTD vs. 23% a YTD decline for the MSCI China Index. The SW F&B index is trading at 34.2x 12m trailing P/E, in line with the past 5yrs average mean. Our top picks are Moutai, Tsingtao Brewery, Yili, Lining and Proya. The risk includes slower than expected recovery.