Highlighted companies
Li Ning Company ADD, TP HK$113.0, HK$64.4 close
We reiterate our Add rating for Li Ning to reflect its large potential to deliver strong sales growth and margin improvement from product structure upgrades. We believe it will use its advanced technology to continue to launch successful new products and expand its online sales. Downside risks include any quality issues and Covid volatility reducing outdoor activities and sportswear demand.
Proya Cosmetics ADD, TP Rmb189.0, Rmb159.6 close
We reiterate our Add rating for Proya, due to its strong R&D capability to launch new star products and further develop its self-live broadcasting activities. A key positive catalyst is higher than-expected sales growth in 2H22F. And the key risks are weaker cosmetics demand and increasing selling and marketing expenses.
Tsingtao Brewery ADD, TP HK$96.20, HK$72.70 close
We reiterate our Add rating, since we believe Tsingtao still has large room to implement its premiumization strategy and improve its margins. Positive catalysts would be stronger than-expected revenue growth and distribution expenses control. A risk is higher-than expected raw material cost pressure.
Marginal recovery in consumption data in Aug
- We saw a marginal recovery in the consumption data in Aug, owing to the low base last year and the positive impact of government stimulus policies.
- However, due to the recent Covid volatility since late Aug, we remain cautious about Sep consumption data and expect a gradual recovery in 4Q22F.
- We expect the government to release more stimulus policies in 2H22F, mainly from the supply side to boost demand.
- We reiterate Overweight for the consumer sector; our top picks are Moutai, Tsingtao, Yili, Proya and Lining.
Most categories saw improvement in August
China retail sales grew by 5.4% yoy in Aug vs. 2.7% yoy in Jul and 3.1% in Jun. Excluding autos, retail sales grew by 4.3% in Aug vs. 1.9% in Jul and 1.8% in Jun. Most categories saw an improving trend in Aug, except for cosmetics, home furniture, telecommunications, and construction materials, which declined 6.4%, 8.1%, 4.6% and 9.1% yoy, respectively, impacted partially by the weak property sector. Auto and jewelry sales grew fast at 15.9% and 7.2% yoy in Aug. Consumer staples showed resilient growth, with grain & food, beverages, tobacco & alcohol, and household product sales growing by 8.1%, 5.8%, 8.0% and 3.6% yoy in Aug. China retail sales grew by 0.5% yoy in 8M22 vs. a decline of 0.2% yoy for 7M22. By channel, online retail sales of goods grew by 12.8% yoy in Aug vs. 10.1% in Jul, while offline retail sales of goods grew by 2.3% yoy in Aug vs. 0.9% yoy in Jul. Online retail sales of goods grew by 9.2% yoy for 8M22 vs. 8.6% yoy for 7M22, while offline retail sales of goods saw a decline of 1.8% yoy for 8M22
vs. 2.3% yoy for 7M22, indicating that the online channel continues to take share from offline channels. We expect the upcoming Double 11 online shopping festival to further boost online sales growth.
Catering services starting to see an improving trend
China retail sales of catering services returned to positive territory at 8.4% yoy in Aug vs. a decline of 22.7%, 21.1% and 4.0% from April to June. Catering services were severely affected by the Covid lockdowns in 2Q22. We expect a better recovery trend for catering services in 2H22F, given the easing Covid lockdown measures compared to 1H22 and the low base in 2H21, which should also benefit catering-related sectors, like condiments. Along with the ending of the lockdowns in Chengdu and Sanya on Sep 15, we expect catering services and domestic consumption to gradually recover in 4Q22F.
Continued pressure on the tourism sector
Covid resurgences continued to impact tourism sentiment during the Mid-autumn Festival. China reported an average of 234 Covid cases during the Mid-autumn Festival (Sep 12–14), with covid resurgences occurring in many cities; some cities in Sichuan, Hainan, Tibet and Guizhou are still under lockdowns. Foot traffic was down 16.7% yoy to 73.4mn people for this year’s Mid-autumn Festival, recovering to 72.6% of the level in Total sales reached Rmb28.7bn, down 22.8% yoy, recovering to 60.6% of the level in 2019. The travel data for this year’s Mid-autumn Festival was weaker than that during the Dragon Boat Festival, but better than that on the Qingming and May Labor Day holidays. In 2H22F, we expect some travel recovery for the upcoming Oct National Day Holidays, given the current easing of Covid lockdown measures. According to Ctrip, prebookings for National Day Holiday week were up 64% wow, and booking numbers are gradually improving from the Mid-autumn Festival to the National Day Holidays, with daily booking numbers growing by 30%.
Reiterate Overweight for the China consumer sector
We reiterate Overweight for the China consumer sector, since we expect to see a gradual consumption recovery in 4Q22F. We also expect to see a further relaxation of Covid related policies in 1H23F, which should further boost domestic consumption. Our top picks are Moutai, Tsingtao Brewery, Yili, Proya and Lining. The key risks are a resurgence in Covid cases in 4Q22F, which will impact consumer sentiment and demand, and higher-than-expected raw material prices.
