Consumption recovery slowed down in 2Q23
- We invited 16 companies to attend our 3rd Annual China Consumption Hybrid Corporate Day held on 6-7 Jul.
- We observed a consumption recovery slowdown in 2Q23, e.g. for the catering and sportswear sectors. But the tourism sector maintained strong growth momentum.
- Most consumer companies will benefit from lower raw material prices this year, especially instant noodle and tissue players, in our view.
- Currently, the overall valuation for the consumer sector is not demanding, in our view.
- We reiterate our Overweight rating for the consumer sector. Our top picks are China Resources Beer (CRB), Moutai, Anta, Jiumaojiu (JMJ) and Trip.com.
Anta Sports
ADD, TP HK$133.0, HK$81.0 close
We reiterate our Add rating as we see longterm positive growth potential to improve store efficiency and margins for Anta Group. A positive catalyst would be better-thanexpected retail sales and margins. Key risks are: 1) weak macro, which would impact sportswear demand, and 2) intense competition, which would incur more discounts and dilute margins.
China Resources Beer
ADD, TP HK$79.00, HK$48.25 close
We reiterate our Add rating, as China Resources Beer (CRB) has more margin improvement potential, given its current beer mix upgrade trend and likely strong baijiu profit contribution in the medium term. A risk is higher-than-expected raw material costs.
Jiumaojiu
ADD, TP HK$25.00, HK$13.46 close
We reiterate our Add rating, as we believe Jiumaojiu (JMJ) group has room to open new stores and improve store profitability. A key positive catalyst would be accelerated store openings and a better table-turnover rate and SSSG. Key risks are: 1) weak macro, resulting in lower dine-out frequency and offline traffic, 2) fewer new stores being rolled out, which would impact the company’s topline, and 3) higher raw material prices, affecting margins.
Lower raw material prices and beer premiumisation
Most consumer companies said they will benefit from lower raw material prices this year. Tingyi said in the call that it expects to benefit from the lower palm oil and PET prices in 1H23F; we expect Tingyi’s net profit to grow over 30% yoy in 1H23F. Wood pulp prices have also fallen yoy since Mar 23, but because Hengan still has 4-4.5 months of pulp inventory, it said it will only start to use cheaper wood pulp from 2H23F; we now expect Hengan’s net profit to drop yoy in 1H23F due to cost pressure, but to return to positive yoy growth in 2H23F. CRB expects barley prices to increase 15% yoy in FY23F, but that it will benefit from lower packaging material prices. CRB guided for mid- to high-single-digit sales volume growth in both 1H23F and FY23F, with ASP up by mid single-digits and yoy margin expansion. CRB’s sales volume growth slowed down in May 23 due to a high base last year, but premium products achieved over 20% yoy sales volume growth in 5M23.
Slower catering recovery since May, but still strong tourism growth
JMJ said in the conference that its yoy SSSG was 5% in Jun and 8% in May (vs. 33% yoy in Apr), and that its SSSG was back to 81% and 80% of 2019’s level in Jun and May respectively (vs. 84% of the 2019 level in Apr). We note a catering recovery slowdown for the whole industry since May, per retail sales data; JMJ said it expects better recovery in 2H23F, supported by better holiday seasons and better offline traffic. Nayuki’s management said its Jun order volume grew 5% yoy, with an average ticket size of Rmb29.5 (-5% yoy), and its SSSG was largely flattish yoy in Jun. Fosun Tourism Group said it achieved offline traffic volume growth of 30% and 40% yoy for Club Med and Atlantis Sanya hotel during the Dragon Boat Festival (22-24 Jun), with average daily room rate (ADR) up 10-15% vs. 2019 levels; the company said it expects the traffic growth trend to continue in the summer season. The outbound travel should see better growth in 2H23F, according to Fosun, supported by holiday seasons and outbound flight capacity recovery.
Sportswear growth a bit weak since the second half of May 23
Anta said its sales growth has slowed since the second half of May. Online sales of its Fila brand grew strongly in 2Q23, better than its offline growth. While its Anta brand’s online growth was relatively weak, its offline sales picked up quickly. Competition was more intense during this year’s 6/18 shopping festival in Jun, hence it increased the discounts for its Anta brand. Management maintains its previous guidance of double-digit sales growth and NPM yoy improvement in FY23F. Management said its channel inventory remained stable qoq in 2Q23, and expects further channel inventory improvement in 3Q23F. It added that Anta will not increase its discount levels in 3Q23F.
Reiterate Overweight for China’s consumer sector
We reiterate Overweight on China’s consumer sector because of the low base in 2022 and improving offline activity. We believe the overall consumer sector recovery trend would be more favourable in 2H23F, driven by increasing travel activity and consumer confidence. The MSCI China Index is trading at 10.3x 2023F P/E vs. the MSCI China Consumer Staples Index’s 20.8x, lower than their respective five-year average forward P/E of 11.8x and 22.3x. A key positive catalyst would be better-than-expected travel and consumption data in 2H23F. Downside risks: 1) weak macro, leading to weak consumption sentiment, 2) fluctuating raw material prices, which may lead to GPM pressure, and 3) intense competition, which would dilute margins.
Consumption recovery slowed down in 2Q23
CRB (291 HK, ADD, TP: HK$79.0 CP: HK$48.5)
In the conference call with CRB, management said it expects its beer sales volume in 1H23 to grow a mid single-digit yoy, in line with its previous expectation, and ASP to also increase by a mid single-digit yoy. Its beer channel inventory remains at a healthy level of less than one month. Management said CRB’s sales in Jul and Aug might be slightly affected by the high base of last year, but it expects sales volume in 2H23F to still grow by mid-single digits yoy.
Although May sales volume growth slowed down to low single-digits yoy, due to the high base last year, the premiumisation trend remained quite solid, since many night clubs and pubs reopened this year. The company’s product structure upgrade is catering for the current China beer consumption upgrade trend. Management expects sales volume of its premium and above products to grow by 20% yoy in 1H23F. Of this, Heineken products should achieve about 30% yoy volume growth in 1H23. Heineken achieved strong growth in its three key markets – Zhejiang, Fujian and Guangdong – in 1H23 with double-digit sales volume growth yoy in 1H23. Heineken products also performed well in other markets, like Jiangsu, Anhui, Shanghai, Sichuan, Guizhou and Liaoning provinces. Sales volume of Laoxue, Super X and Snow draft also grew by more than 10% yoy in 1H23. Sales of lowend beer grew faster than that of the mid- range products in 1H23. The sales volume proportion in the on-trade channel vs. the off-trade channel is now is at 40–45% and 55– 60% in 1H23. The on-trade channel contributes 70–78% of sales volume for premium and above products.
CRB locked in barley inventory for FY23F. Management expects the barley price to increase by 15% yoy this year and cause some cost pressure in FY23F. But prices of packaging raw materials are falling, which should benefit the GPM. The GPM should improve yoy this year, driven by lower raw material prices and product structure upgrades. In the medium to long term, management expects packaging prices to continue on their upward trend, given the global inflationary environment and geopolitical factors. The annual capex for CRB for next three years will be Rmb2.5bn–3.5bn per year. CRB will continue to effectively control the SG&A expenses ratio, and management aims to further reduce the SG&A expenses ratio slightly yoy in FY23F.
CRB’s baijiu business, Jingsha Jiuye (Jingsha), was consolidated in Feb 2023. In the past couples of months, CRB adjusted Jingsha’s organisational structure and management team, optimised the operating systems, and built some commercial channels for baijiu products. The company also recruited new baijiu distributors in new commercial channels. Management believes these adjustments will benefit Jiangsha’s future development. CRB also repurchased some channel inventory from distributors to accelerate Jingsha’s channel inventory returning to normal, in order to stabilise the product’s market price. Also, Jingsha will launch some new baijiu products (with a retail price of Rmb500 per bottle or lower) soon for the peak sales season – the Autumn Festival. Management expects the baijiu business to perform better hoh in 2H23F. Management also said that they do not expect the channel inventory reduction and system restructuring for Jingsha to result in significant expenses for CRB this year.
Anta (2020 HK, ADD, TP: HK$133.0 CP: HK$79.8)
The company will announce its 2Q23 operating data in the next two weeks. The April data were good, but growth slowed down from the 2nd half of May on. Owing to last year’s low base, 2Q23 sales growth was still in line with management’s expectation. Fila’s online sales grew strongly in 2Q23, better than offline growth. While the Anta brand’s online growth was a bit weak, its offline sales picked up quickly.
Competition during this year’s 6/18 festival intensified. Management noted some recovery for Nike and Adidas, but it believes the recovery of Adidas will still take time. Fila’s growth was stronger than that of the Anta brand during the 6/18 festival, and the Anta brand increased its discount level during the 6/18 festival.
Management maintains its previous guidance of double-digit sales growth and NPM improvement yoy in FY23F.
Channel inventory remained stable qoq in 2Q23, and management expects further channel inventory improvement in 3Q23F. The company will not further increase the discount level in 3Q23F.
The company will sponsor the national sports team for the upcoming Asian Games in Sep, but the related marketing expenses will not be as large as those for the Winter Olympics last year.
Anta established a new business unit to expand in the South East Asia market this year and open less than 100 new stores. Currently, overseas sales account for low single digits of total sales. For overseas stores, the company has adopted the wholesale model.
Management expects margin expansion in FY23F because 1) the discount level will be reduced in 2H23F, 2) raw material prices, especially for packaging materials, have fallen, 3) the ASP increased due to a mix upgrade, and 4) operating leverage has improved.
The 1H23, government grants were Rmb200m less than in 1H22, but for FY23F, total government grants will still be Rmb1.7bn–1.8bn, in line with that of last year.
Currently, the Anta brand’s selling prices are still 20–30% cheaper than Nike’s and 10– 20% cheaper than Lining’s.
Because of Anta’s slower online growth this year, the online sales contribution this year will be lower than last year’s 35%.
Amer’s top line is doing well in 1H23, but the Euro interest rate increase will negatively impact net profit in 1H23. For FY23F, management maintains its previous guidance that Amer will contribute Rmb200m in net profit. Amer has two Euro debts: €1.3bn, which needs to be paid in Mar 2024, and €1.7bn, which needs to be paid in Mar 2026. The recent share placement is related to debt payment, working capital and shareholding increase for Amer.
The online platform sales breakdown is 50–55% for Tmall, and 15% each for Douyin, JD and VIPshop as at 1H23.
Jiumaojiu (9922 HK, ADD, TP: HK$25.0 CP: HK$13.6)
Compared to 2019, overall SSSG had recovered to 80–85% as at end-2Q23, and management expects the overall recovery to reach 80–90% by the end of 2023. Management said in the call that overall consumption sentiment was still impacted by relatively weak macro in 1H23.
For the Taier brand, SSSG recovered to 80% in 1Q, 84% in Apr and 80% in May (89% in the 1 May Labour Day holiday) and improved to 90% during the Dragon Boat Festival in Jun. For Song Hotpot, compared with 2022, SSSG improved to 120% in 1Q23, 128% in Apr and 105% in May. The Jiumaojiu brand recovered to 80% of the 2019 level in 1Q23, 85% in Apr and 79% in May. The overall table-turnover rate was 4.1x in 1Q23, 3.9x in Apr and 3.7x in May, and the ticket size remained largely stable yoy.
The Company had set a restaurant opening target of 120 for Taier (15 to be opened in international markets), and 25 for Song Hotpot for FY23F. For the Taier brand, the restaurant opening target will remain unchanged, but management increased Song Hotpot’s target to 30. As at end-Jun, the company had opened 16 new Song Hotpot restaurants and 33 Taier restaurants. Also renovations were completed for 13 Taier restaurants in FY22, which were formally reopened in early FY23, thus totalling 46 Taier restaurants. The total number of Taier restaurants in operation reached 496 as at end-Jun. The Company also opened four new Laimeili stores as at end-Jun. Management said in the call that currently, they have no KPI and store opening target for Laimeili and that they are still looking for suitable locations for the brand. For the Jiumaojiu brand, the company closed one restaurant in 1H23.
The Company aims to open 15 overseas Taier restaurants in FY23. It opened one in Feb and one in Jun, and will open two in 3Q23. The rest are expected to be opened in 4Q23.
The capex per store in Singapore is roughly Rmb5m–6m and the OPM is roughly 2–3x that of its stores in mainland China. In the mid-long term, the company aims to open 200–300 restaurants in overseas markets, including South East Asia, Hong Kong, Singapore, Japan, Korea, Canada and the US.
Management also guided a stable yoy GPM for FY23. Going forward, GPM improvement is largely expected to improve from a higher contribution of self-feeding bass and improved operating efficiency.
In terms of mid-long-term OPM guidance, management aims to achieve 23% OPM for Taier when Taier reaches 1,000 stores, and 20% OPM for Song Hotpot when it reaches 300– 500 stores. For the Jiumaojiu brand, the OPM should remain largely stable.
Tingyi (322 HK, ADD, TP: HK$16.1 CP: HK$11.6)
Management said in the call that overall sales performance improved qoq in 2Q23 and that it expects 2H23F sales to be better than those in 1H23, driven mainly by strong beverage growth and noodle sales recovery. Top-line guidance for FY23F is expected to remain in the high single digits yoy, with the noodle segment reaching low to mid-single digits yoy and beverages reaching high single digits yoy. For the bottom line, the company will maintain its guidance of Rmb3.5bn for FY23F.
Tingyi raised its ASP in Feb, Apr and Jul 2022, which had a negative impact on noodle sales, but this was partially offset by the higher ASP. Its market share has been gradually improving mom since 4Q22, and management expects the momentum to continue. The beverage segment will benefit from the resumption of offline traffic, hot weather this summer, and the increased ASP for carbonated drinks and water.
Its GPM is expected to expand in 1H23F and 2H23F, driven by price hikes and lower raw material prices. GPM expansion in 1H23 will be driven by lower palm oil and PET prices, and management expects raw material costs to continue their downward trend in 2H23F, except for the domestic sugar price. Fluctuating sugar prices may have some impact in 2H23F, but management said the impact should be manageable.
Tingyi will continue to roll out new products in the noodle segment and lower-sugar and zero-sugar products in the beverage segment. Sales of water are expected to grow 30% yoy (+20% yoy in FY22), driven by the resumption of travel and offline activity. Juice products are expected to remain popular, per management said in the call. The recovery of pickled noodle sales reached c.80%, and management expects this to fully recover by the end of FY23.
Want Want (151 HK, ADD, TP: HK$6.3 CP: HK$5.2)
The company just reported its FY3/23 results. Revenue was down 4.4% yoy to Rmb22.9bn, dragged down mainly by dairy sales (-13.5% yoy to Rmb11.1bn). Sales of Hot-Kid Milk (c.90% of dairy and beverage revenue) declined by double digits yoy, affected by the lockdowns, partially offsetting the high single digit yoy increase in beverage sales. Management said in the call that the decline in Hot-Kid Milk sales was due mainly to 1) a high base in FY3/22, and 2) the impact of Covid lockdown measures on specialty channels and the catering channel. Entering 2023, management saw a clear recovery trend after the pandemic. Days inventory improved from 30–35 to 20–25, driven by better sell through from Jan to Jun. The company also launched innovative marketing programmes at key periods, such as the Labour Day holiday, Jun 1 Children’s Day, and the Jun exam period. Revenue from rice crackers grew by 4.5% yoy, driven by growth in gift pack sales (double digits yoy), product price hikes, the recovery in overseas markets, and the rising contribution from emerging channels and new products. Revenue from snacks grew 7.8% yoy, driven by popsicles, candies, beans and jelly products in FY3/23.
The revenue contribution from new products reached double digits in FY3/23. The company rolled out many new products, such as nut and chocolate flavour Hot-Kid Milk, which contributed sales of Rmb200m in FY3/23. The company also rolled out the Hot-Kid milk (red label bottle) for the convenience store channel, and plans to roll out a greater variety of sizes and packaging.
For mid to long-term, management expects new channels to drive more new products sales, with new channels reaching 20% of total sales. Currently, sales from traditional, modern and overseas channels account for c.80%/high single/5% of total sales, respectively. The company just established a new team for the catering channel (it used to sell products to distributors, which sold the products to catering service operators).
The GPM was down 0.9% pts to 43.9% in FY3/23 (42.8% in 1H and 44.9% in 2H) due to high raw material costs in 1H FY3/23. But the GPM improved in 2H, due mainly to lower raw material costs, such as whole milk powder (20% of COGS) and palm oil (low single digits of COGS), and price hikes in Nov 2022. Management said the fluctuation in sugar prices would not have a material impact on the GPM, as sugar accounts for only 5% of COGS. Management commented in the call that the GPM would likely further improve yoy in FY3/24F.
The Vietnam plant started operations in 1H FY3/23. Currently, the production scale in the Vietnam production plant can reach US$100m, and management is considering expanding the plant in 2024 to support category expansion, including popsicles, dairy and beverages, and localized products. Management expects the overseas market to be a key growth driver for the next 3–5 years, and expects Want Want to continue to expand the sales contribution from overseas markets (currently overseas markets contribute 5% of total sales). Want Want set up five overseas sales offices in Germany, Indonesia, etc. to drive overseas sales. Currently the overseas business is profitable (i.e. lower ASP and costs in Vietnam, resulting in lower margins than those in China due to lower utilization).
Hengan (1044 HK, ADD, TP: HK$42.7 CP: HK$30.5)
The company maintains its top-line guidance of double-digit yoy sales momentum in FY23F, driven by its tissue business, which maintained double-digit yoy sales growth in 1H23F, and management expects this to continue in 2H23F. New retail (accounting for 30% of tissue sales) and e-commerce channels continued to deliver fast double-digit growth yoy, while the distributor channel delivered single-digit yoy growth in 1H23F. Sales of premium tissue brands, such as the Cloudy series and wet tissue, accounted for 20% of total tissue sales and delivered double-digit yoy sales momentum in 1H23F.
Sales of sanitary napkins are expected to be weak, in the low-single digits yoy in 1H23F, driven mainly by a better product mix, per management said in the call. Sales volume continued to suffer from competition from international brands. Management guided largely stable sanitary napkin sales yoy in FY23F.
Diaper sales are expected to show positive yoy growth in 1H23F, driven by adult and premium baby diaper products (double-digit yoy growth), per management said in the call. The Qmo brand continued to deliver double-digit yoy sales momentum in 1H23F.
Management guided positive yoy growth for the diaper business in FY23F. Other revenue (trading, medical products, etc.) is expected to decline yoy in FY23F.
Although pulp prices declined in 1H23 (down 20% yoy in 2Q23), the company will enjoy the lower pulp prices only in 2H23F since it previously stocked up on pulp inventory. Its GPM may potentially have pressure in 1H23F.
Management expects the SG&A to increase by double-digits yoy, as the company has been investing in its brand image to support its upgraded products.
Management also expects a potential exchange loss to be incurred in 1H23F due to Rmb depreciation in 2Q23.
CMD (1117 HK, ADD, TP: HK$1.4 CP: HK$0.8)
The overall performances in Jan–May was in line with management guidance. 1) Herd size grew 10% yoy to 415k (guidance was high-single digits yoy), driven mainly by internal production. 2) Production volume grew by 8–10% yoy to more than 1m tonnes, in line with the high-single digit yoy growth guidance. And 3) unit yield grew 2–3% yoy, in line with its guidance of low-single digit yoy growth.
The milk price declined by low-mid-single digits yoy, better than the overall market’s 5.6% yoy drop from Jan to Jun. The market supply of milk was up 8.6% yoy in 1Q. Every year, supply is greater than demand from Feb to May, and it becomes more balanced from May to Jun. Demand has been weak since 2H22 due to slower growth of consumer product sales, which caused an oversupply of raw milk, and the trend continued in 1H23. We believe that as herd expansion slows down and demand recovers, supply and demand will be more balanced in FY24.
Feed costs increased by mid-high single digits yoy. Feed costs showed a declining trend yoy in May. Management expects feed costs to drop further in 2H23F, and guided a decrease in feed cost per kg of milk by 1–2% yoy for FY23F.
The company’s GPM continued to suffer from lower milk prices and higher feed costs, so the GPM for Jan to May fell, but it gradually improved mom. Management aims to reach a flattish GPM yoy for FY23F with an improved GPM in 2H23F as a result of lower feed costs. The company guided flattish yoy Capex for FY23F, mainly for maintenance. The company’s gearing ratio is expected to be high by 2025, as it is still in the expansion stage.
Sun Art (6808 HK, HOLD, TP: HK$2.6 CP: HK$2.2)
Sun Art made high-single digit yoy negative revenue growth in Apr and May for its ToC business, including online and offline business. The online ToC business has its own apps, Taoxianda and Elema. In Jun, Sun Art’s sales improved, but were still in negative growth territory yoy. Sun Art’s SSSG in 1Q FY3/24F declined by mid-to-high single digits yoy, with customer traffic growing by 2–3% yoy, but ticket size declining by 10–11% yoy. Management said this performance was in line with their expectations. The online business, B2B supply chain and offline business contributed 20–23%, 10%, and 67–70% of total revenue, respectively, in 1Q FY3/24F. In 1Q FY3/24F, Sun Art opened six supermarkets and closed one hypermarket and seven mini stores. So Sun Art had 485 hypermarkets, 18 supermarkets, 77 mini stores and one membership Club (M Club) at the end of 1Q FY3/24F.
Management said there is an upgrading trend in FMCG and fresh products, because people are focusing more on healthy food. So the average selling price per piece increased slightly, but the ticket size declined, mainly because customers purchased fewer pieces per ticket.
In 1Q FY3/24F, the GPM expanded by 0.2–0.3% pt yoy, driven mainly by 1) a channel mix change, i.e. a smaller contribution from the lower GPM B2B business; and 2) a higher sales contribution from higher GPM private label products.
Sun Art has total GFA of 13.79m square meters, and the vacancy rate, which is related to sub-leases, is 4.2–4.3% now. The company aims to achieve a 2–3% vacancy rate by the end of fiscal year 2024. In terms of rental income, the company aims to achieve flattish or slightly lower 2–3% yoy in FY24F. Management expects stable rental income and a low vacancy rate in the next three years.
In terms of expansion, management said they will focus mainly on supermarkets and the M Club. The hypermarket situation is currently dynamic. Management expects a possible negative net opening of hypermarkets, but they will open c. 15 supermarkets in FY24F (six opened YTD) and open one M Club in Nanjing by the end of this year. Management said they have over 20 properties that meet the requirements for opening an M Club. If the first three M Clubs are successful, they will accelerate openings of M Clubs. Capex for FY24F will be c. Rmb3bn, including Rmb800m for remodelling 100 stores, Rmb140m for two M Club openings, and Rmb800m for maintenance.
Nayuki (2150 HK, Not Rated, CP: HK$5.6)
Management said revenue in 2Q23 was a bit weaker than they anticipated at the beginning of the year. Sales in 2Q23 were flattish qoq compared with those in 1Q23. The company aims to open 350–400 new stores in FY23F, per management said in the call. Nayuki opened 130–140 stores in 1H23 and closed mid-teens stores in 1H23, which is in line with management’s expectations. Management said they will accelerate new store openings in 2H23F. As the company has taken a lot of measures to reduce operating costs, they maintain their margin guidance unchanged at 5% net profit margin and 20% OPM at the store level for FY23F. In the call, management said 3Q is usually the peak sales season for Nayuki, and the company will wait for the 3Q23F performance to see if they need to change their guidance for FY23F.
Management believes a 5% net profit margin is achievable in FY23F, driven mainly by lower labour costs and rental cost from the different store mix. Currently, the company is opening new stores in locations such as residential areas and office buildings with much lower rental rates than in shopping malls. The new stores usually have 5–6 full-time employees and 5–6 part-time employees, per management said in the call . The company has a much more flexible labour force structure than before. It aims to maintain the labour cost at the store level at 19% of total revenue in the short to mid-term, per management said in the call. The headcount at the Nayuki headquarters is basically frozen, and in the future they will optimise the operating effectiveness at headquarters to introduce more cost efficiency and maintain the headquarters labour cost at below 7% of total revenue in the future, per management said in the call.
The food delivery sales contribution has declined in the post-Covid period, from 50% in FY22 to 40% now. Management said that currently 37–38% of revenue comes from food delivery, which includes Elema, Meituan and its own mini apps. Management aims for only 1/3 of revenue to come from the delivery orders in the future, as they have to pay a 20% take rate for delivery orders. Management also said they will open more stores in tier 1 cities. Management does not believe the market in tier 1 cities has reached saturation level yet; for example in Shenzhen, Nayuki has over 180 stores, and management believes they can open 300 stores in Shenzhen before seeing any significant signs of cannibalization in next two or three years.
Fosun Tourism (1992 HK, Not Rated, CP: HK$7.7)
In the call, management said that this year, both its domestic and overseas business is on a recovery trend. Sales in 1Q23 reached a high level, growing by 37% yoy to Rmb5.9bn; of this, Club Med contributed Rmb5bn in sales in 1Q23, up by 44% yoy and 22% higher than that in 1Q19.
For the Club Med segment, resort capacity in 1Q23 recovered to the same level as in 2019, and the average occupancy rate in 1Q23 reached 68.9%, 1.5% lower than that in 1Q19. The average daily room rate (ADR) was Rmb1,942 in 1Q23, 31% higher than that in 1Q19. So the net profit for Club Med significantly improved compared with that in 2019.
With Covid controls fully relaxed, Atlantis Sanya performed well in 1Q23, driven mainly by the traffic volume recovery. Its sales in 1Q23 grew by 39% yoy to Rmb527m, with the average occupancy rate reaching 94.2% in 1Q23. The ADR declined by 10% yoy to Rmb2,571 in 1Q23, due mainly to the increased proportion of meetings, incentives, conferences and exhibitions in the business sector. Management expects Atlantis Sanya’s full year ADR this year to improve yoy (Rmb2,400 in FY22). Sales for Lijiang Foliday Town grew by 130% yoy to Rmb21m in 1Q23.
Management said that in Apr–Jun, sales of Fosun’s Club Med China business was 110% of that in 2019, and that sales of Atlantis Sanya were 67% higher than those in 2019. During this year’s Labour Day holiday (1–3 May), the ADR of Atlantis Sanya reached Rmb4,300, and the average occupancy rate for both Club Med China and Atlantis Sanya was 90%.
During this year’s Dragon Boat Festival (22–24 Jun), compared with the same period in 2019, traffic volume at Club Med China was 30% higher than the level in 2019, and that at Atlantis Sanya was 40% above that in 2019. Management said that currently, they have started to receive booking orders for summer vacations, and that the current daily room rate on the Trip.com booking platform has reached Rmb3,500 per night for Atlantis Sanya. Management is quite confident about sales growth for the summer season.
Regarding the current consumption downgrade impact, management said they have not seen any impact on their business, as their resorts and hotels target mainly the middle class and above consumer groups. Management said that in 2023F–25F, they expect to add 17 new resorts and hotels and increase the capacity of its resorts by 20% in FY25F for Club Med, compared with that in FY22.
In terms of debt, management said that the company will consistently reduce its debt level in the long term, and that it repaid Rmb1.3bn in debt in FY22.
Miniso (9896 HK, Not Rated, CP: HK$34.7)
Management said in the call that the overall performance was in line with its guidance. The company guided revenue of Rmb11bn–11.5bn for FY23F, implying growth of 20–30% yoy (20% yoy in domestic and 30–40% yoy in overseas markets). SSSG is expected to recover to the CY21 level and to 85% of the CY19 level. Management also guided a GPM of 35% at the beginning of the year, and set a new GPM target of 38–40% (the last reported GPM was 39%), driven by 1) upgraded products in the domestic market, which drives up GPM, and 2) a higher contribution from overseas markets (higher GPM in overseas markets; the wholesale GPM was 35%+ and the direct sales GPM was 50–60%). Management also increased its guidance for the NPM from 11–13% to 14–16% for FY23F.
The company opened 100 stores during the Labour Day holiday, concentrating in lower-tier cities. For FY23F, the company raised its domestic store-opening target from 250–350 to 350–450, per management said in the call. For overseas markets, the company maintains its original target of 350–450 stores. Currently, it has stores in 106 overseas markets, 95% of which are operated by wholesalers.
The company didn’t set a target for Top Toy, but they think the toy bricks have huge potential and expect them to be the driver for Top Toy.
The company has a strong relationship with suppliers (over 1,100 suppliers covering 11 different categories). It uses the SCM system to manage its supply chain.
China Education Group (839 HK, ADD, TP: HK$21.4 CP: HK$6.0)
Management said in the call that the student intake quota increased by 16% yoy in FY8/24, driven by strong demand. Management guided both top- and bottom-line growth of reach 15%+ yoy for FY8/23F. Excluding potential M&A, management expects 10% yoy growth in new enrolment in the mid to long term, and 15% yoy growth for both top and bottom line, driven by new enrolment (10% yoy) and tuition fee increases (5% yoy).
Management also commented that the guidance has incorporated the impact of the Hainan school. Following CEG’s acquisition of 60% equity interest in the Hainan school in Aug 2020, it is entitled by contractual arrangements to 100% of the school’s operating results until end-Feb 2023.
Management commented that the potential for M&A at this stage is low considering the current valuation. The company will repurchase more shares to return to its shareholders. Pre-approval for the profit model for the Jiangxi School was completed. The Jiangxi School paid Rmb100m to purchase land. For the rest of the schools, shareholders have a strong preference for the profit model, so currently, two or three schools are preparing to register this year.
Valuation
We reiterate Overweight on China’s consumer sector because of the low base in 2022 and improving offline activity. We believe the overall recovery trend would be more favourable in 2H23F, driven by increasing travel activity and consumer confidence. The MSCI China Index is trading at 10.3x 2023F P/E vs. the MSCI China Consumer Staples Index’s 20.8x, lower than their respective five-year average forward P/E of 11.8x and 22.3x. TPs for our coverage stocks are derived using a DCF based valuation approach. A key positive catalyst would be better-than-expected travel and consumption data in 2H23F.
Downside risks: 1) weak macro, leading to weak consumption sentiment, 2) fluctuating raw material prices, which may lead to GPM pressure, and 3) intense competition, which would dilute margins.