CITIC Securities: Where are the opportunities for consumption to rebound?

The Zhitong Finance App learned that CITIC Securities released a research report saying that favorable policies exceeded market expectations, and consumption experienced a sharp rebound amid deep revisions in early valuations and low holdings. Looking ahead to the future market, the post-consumer cycle is characterized by remarkable characteristics, and expectations of economic recovery after a clear policy attitude will positively drive the consumption boom back up expectations. Consumer valuations are still at historically low levels after experiencing the release of early pessimism, and since 24Q4, the consumer sector itself is at a steady inflection point as pressure on most consumer sectors has eased. It is recommended to actively treat consumption recovery opportunities under policy changes.

The following is a summary of the research report:

The favorable policy exceeded market expectations, and consumption experienced a sharp rebound in the face of deep revisions in early valuations and low holdings. Looking ahead to the future market, the post-consumer cycle is characterized by remarkable characteristics, and expectations of economic recovery after a clear policy attitude will positively drive the consumption boom back up expectations. Consumer valuations are still at historically low levels after experiencing the release of early pessimism, and since 24Q4, the consumer sector itself is at a steady inflection point as pressure on most consumer sectors has eased. It is recommended to actively treat consumption recovery opportunities under policy changes. We continue to recommend an aggressive and defensive consumer internet, essential sectors such as dairy products and popular restaurants, which are undervalued and have high returns and are expected to take the lead in stabilizing operations, as well as a procyclical direction driven by the restoration of economic expectations: alcohol, human resources, hotels, etc. From the perspective of market sustainability and room for growth, it depends on the specific effects of subsequent policies after implementation, but it is currently at an inflection point driven by a clear policy shift.

Incident: Policy shifts to reverse market expectations, and the consumer sector rebounded sharply.

Stimulated by policies such as the financial supervisory authority's policy punch on September 24 and the September 26 Politburo meeting to study the economic situation, A-shares and Hong Kong stocks have all achieved significant gains recently. Among them, various consumer sectors such as alcohol, food and beverage have performed well. In the three trading days since September 24, the CITIC First Class Industry Index has increased by 17.4%/12.8%/10.3%/9.8%/10.3%/9.8%/9.6%/9.4% in the three trading days since September 24.

Why has the consumer sector rebounded so much?

Consumption is an industry with obvious post-cycle characteristics. Against the backdrop of uncertain economic expectations over the past year, pessimistic market expectations have continued to accumulate, and the weak macroeconomic environment has clearly suppressed consumer valuations. However, at this point in time, the strength on the policy side has exceeded market expectations. From general political bureau meetings focusing on domestic demand, to local or ministerial departments implementing various types of consumer vouchers, subsidies, etc., the policy attitude is already clear. Consumption rebounded clearly against the backdrop of continuous valuation adjustments and historically low holdings.

What are the chances of a subsequent rebound in the consumer sector?

From a valuation perspective, even after a short period of rapid rise, the absolute consumer valuation is still at a low level, and the pivot point is around 15XPE. On the management side, even without considering the potential impact of policies, most consumer industries, especially essential industries, are expected to recover steadily in 24Q4 against the backdrop of reduced base pressure. Therefore, we continue to recommend essential sectors such as dairy products and popular restaurants, where the consumer internet is both aggressive and defensive, undervalued and highly profitable, and is expected to take the lead in stabilizing operations. However, considering capital allocation requirements driven by policy expectations, industries such as alcohol, human resources services, and hotels with obvious procyclical characteristics are expected to perform well. From the perspective of market sustainability and room for growth, it depends on the specific effects of subsequent policies after implementation, but it is currently at an inflection point driven by a clear policy shift.

Consumer Internet: Combining offense and defense, the best policy implementation scenario.

Consumer promotion policies, represented by vouchers, tend to encourage local in-store spending. Consumer internet platforms usually benefit as government vouchers issuance platforms. Furthermore, the performance of the Internet leaders themselves is highly deterministic, and the model moat is high. Previously, most of the Internet leaders were in the phase of increasing their performance without mentioning valuation. Subsequently, driven by positive factors such as interest rate cuts and changes in China's policy, it is expected that the allocation demand for domestic and foreign capital to the consumer Internet will increase.

Popular products: Improved management in the Q4 sector is already a good layout opportunity.

Short-term data on popular products is relatively lackluster, but the policy shift has greatly improved future expectations. Currently, the biggest difference is that more policies that directly stimulate public demand continue to be introduced, including food and beverage vouchers, milk vouchers, etc. We believe there will be more and more similar policies in the future. Negative factors in the past, such as insufficient consumer willingness and capacity, downstream catering prices on upstream, and increased inventory competition, may be reversed. In the short term, we believe that the weak reality of the sector has been fully released in terms of valuations and positions, and that the dividend rate level is also at an excellent level. Even without looking at policy expectations, judging from the industry's own pace, 24Q3 has already passed the inventory stage, and 24Q4 is expected to accelerate with the support of a low base and Spring Festival preparations. Now is also the time for layout. In terms of industry segments, if the policy effect is strong, we believe that the most flexible is the food and beverage supply chain first, followed by dairy products, then snacks and light food chains, and finally meat products and beverages.

Food and beverage: The main beneficiary category of vouchers.

Catering is the main marketing direction for consumer vouchers and is expected to benefit from policy impetus. Currently, most listed catering companies in China are still mainly directly managed, and their operating leverage is quite flexible. We judge that the expected rebound will initially resonate with the sector, and fundamental performance may lag behind. From a fundamental perspective, most companies' 24Q3 operations gradually stabilized, and their performance in August was better than in July. Standing at the point where the sector is booming and valuation is being initially repaired, we still prefer to look at it from a medium- to long-term perspective, combined with track potential, single store model, brand stage and shareholder return expectations, and recommend from three directions: 1) the same store is stable, the current valuation is low, and the shareholder return ratio is expected to be at least in the middle single digit level; 2) High potential racetracks, the freshly ground coffee circuit is alpha strong, and the competitive pattern is improving; 3) Emerging brands, seizing brand potential, and the same store are both in the upward cycle. Rate improvements continue to be realized.

Alcohol: Short-term benefits from valuation restoration, return of capital allocation, and medium- to long-term or diversification of individual stocks.

The liquor industry has high liquidity and strong capacity to accommodate capital. In the past, when policies were in force, liquor was the most obvious direction to take the lead in capital allocation. Combined with the rapid decline in early valuations, the market is extremely pessimistic about the liquor sector, and positions have declined markedly. The sudden warming in market sentiment is expected to lead to a rapid recovery in the liquor sector's valuation. Looking back, we believe that the sustainability and room for growth in the liquor sector is more correlated with subsequent implementation policies and capital trends. At the fundamental level, the actual sales and performance growth rate of liquor are bottoming out, and weak demand on the National Day may suppress the room for a rebound to a certain extent. In the medium to long term, we believe that the liquor industry is currently at the bottom. Leading liquor leaders are increasing shareholder returns through various methods such as increasing dividend rates, repurchases and cancellations, etc., and the medium- to long-term dimensional value support is obvious.

Human resources: A flexible sector in a pro-cyclical period, and the overfall in the previous period is expected to recover.

In August, domestic employment pressure was strong, structural contradictions were prominent, and the unemployment rate continued to rise month-on-month. Against this background, it is of practical significance for the country to introduce employment promotion policies. We believe that in the case where the human resources sector fell sharply in the early stages, valuation repair under policy incentives can be expected.

Light industry manufacturing: valuation repair market under weak reality and strong expectations.

The light industry procyclical sector is mainly household and paper manufacturing. Judging from historical experience, the two are recovering their valuations faster under a pro-cyclical sentiment, but currently both are in a phase of weak reality and strong expectations. That is, the current operation is still under pressure, but with the overall policy reversing confidence to boost potential demand, the sector has certain opportunities for valuation increases.

Social services: suitable for any length, actively configured.

Hotels: 60% to 70% of demand for hotels comes from business travel, which is more pro-cyclical. With economic policy incentives and consumption boosting, leading hotel companies are expected to benefit from the overall cycle rotation, giving priority to recommending high-quality companies with strong operating capabilities and strong brands, which can still guarantee profit margins and speed up store opening when the cycle declines.

OTA: Demand for OTA leisure travel has been relatively resilient since this year, and the performance is better than business travel. The current competitive pattern in the sector has been optimized compared to before the pandemic. OTA commission rates have generally increased, and the operating resilience is relatively stronger than that of upstream resource-side companies. In the face of consumer policy incentives, for example, the platforms that issue consumer vouchers in Shanghai are generally the top 2 to 3 companies, and it is expected that OTA platforms will be the first to benefit.

Textiles and clothing: The manufacturing sector is highly deterministic, and branded apparel is expected to bottom up.

In the textile manufacturing sector, leading companies have strong performance continuity and certainty in the context of brand replacement catalysing and increasing brand demand for high-quality suppliers. In the brand apparel sector, sales in July and August were greatly affected by the weather and improved after September. It is expected that the weather will turn cold after October, which will have a driving effect on clothing consumption. Therefore, regardless of policy factors, the current sector is also in the process of bottoming out fundamentals, and is expected to bottom up after October. Stimulated by policies, we believe that the improvement in consumer expectations will further drive the consumption of branded apparel. Judging from the short-term valuation restoration, we believe that the first to benefit is the industry leader with the best liquidity. Furthermore, we believe that the next two main lines of brand apparel are: first, high dividends. It is expected that such companies will still be the target of key choices in capital allocation in the future; second, cost performance. The so-called consumption downgrade is essentially more rational for consumers. This rationality does not change entirely due to changes in income expectations. We believe that future consumers will still be relatively rational in clothing consumption.

Beauty business: The commercial sector is worth paying attention to, and beauty, and beauty are under phased pressure.

Gold jewellery: Prices with large losses in the previous period, excellent company quality, and high dividend yield rebounded the most, but the overall valuation level was still low, and the dividend yield of sector companies was mostly in the 5%-8% range, which is attractive.

Traditional supermarkets: Affected by industry mergers and acquisitions, the market has begun to re-examine the sector. The competitive environment in the industry has improved, and business operations have gradually improved. In addition, consumer vouchers mostly fall into shopping malls, department stores, etc., and have a good stimulating effect on traffic and income. It is recommended to focus on revaluing the sector.

Beauty: Overall market growth slowed, but the revenue growth rate of 11 listed companies was 24% and net profit growth rate slightly higher than 24% in the first half of 2024, indicating that leading companies are gaining more share. It is expected that this trend will continue, but the growth gap with the industry may narrow in the second half of the year. The focus is on recommending the two main lines of cost performance and nature.

Medicine and beauty: Terminal pressure is under pressure and the price war is severe. Upstream transmission is not obvious for the time being. Currently, it is mainly reflected in the increase in rebates from upstream brands, but prices have not relaxed. In the future, with the increase in registration certificates, it is not ruled out that the shipping prices of individual brands will loosen. Early adverse factors have been fully reflected in stock prices. Changes in medical and aesthetic market value are ahead of fundamentals for about half a year, and are expected to rise steadily in the future. Stimulated by short-term policies, it is expected that companies with better texture and strong overall strength will be the first to rebound; in the second half of the rebound, companies that are isolated on the track and have stronger fundamental support may perform better.

Education: The K12 valuation is expected to be repaired, and the policy favors the vocational education sector.

There was a correction in the early stages of K12 training, but the track is booming. We believe that valuations are expected to increase further as the market recovers. Some training companies in vocational education have a procyclical nature and are expected to benefit from a reversal of policy expectations. In terms of stock selection, first, the Hong Kong stock higher education sector, which is undervalued and has high dividends, has had large excess returns in successive Hong Kong stock market rebounds; second, training companies that have reversed the difficult track.

Agriculture: Meat consumption is expected to benefit from a recovery in demand, and the pet sector is growing rapidly.

Meat consumption is expected to improve, especially in the larger segments related to aquatic products, poultry, and food. In addition to this, there is a logic of supply contraction in the aquaculture sector. Pets are one of the few rapidly growing sectors this year. The Q2 sector's performance reached a record high. Q3 is expected to maintain high growth, and the domestic market size is expected to grow by double digits. In addition, benefiting from the continued increase in industry concentration, the leading revenue side of domestic goods maintained a growth rate of around 30% in Q2. Performance improved year-on-year, and the pet sector had long-term allocation value.

Risk factors:

The decline in economic growth has exceeded expectations, corresponding to the decline in consumer demand exceeding expectations; the risk of changes in policies in various industries exceeding expectations; the risk that inflation exceeds expectations and insufficient ability to raise prices affects profitability; the implementation effect of promulgated consumer promotion policies falls short of expectations, etc.