20211102-招银国际-China_Consumer_Staples_Structural_merits_look_prominent_amid_transitory_headwind_and_any_stagflation_expectation_40页_3mb

China Consumer Staples Summary

Core Content and Key Insights

This report focuses on the China Consumer Staples sector, analyzing the impact of transitory headwinds, stagflation expectations, and structural drivers on food and beverage (F&B) companies. The key factors influencing the sector include:

• Margins Distortion is Transitory: Despite supply shocks and cost inflation, F&B producers are expected to recover, with 2H21 likely marking the trough for gross margins. Premiumization and effective cost pass-through mechanisms are seen as key to maintaining stable margins.
• Property Tightening Impact: The property market downturn has a contagious effect on household consumption, particularly on large-ticket discretionary items, but food and beverage are less affected. Household income remains the dominant driver of consumption.
• Community Group Buying (CGB): CGB is an ongoing but idiosyncratic risk to the F&B sector, especially for products with high channel margins and low product differentiation. Beer and dairy producers are cautious about monetizing this opportunity, while e-vapor and other niche products are less affected.

Main Investment Thesis

Investors should focus on F&B companies with strong pricing power that can maintain steadfast margins despite cost inflation. The report recommends selectivity and highlights companies that have shown resilience and growth potential.

Key Investment Picks

The report initiates 6 F&B stocks with the following ratings and target prices:

• CR Beer (291 HK): Buy, Target Price HK$88.0 (+36.3% upside)
• Mengniu (2319 HK): Buy, Target Price HK$58.0 (+17.1% upside)
• Smoore (6969 HK): Buy, Target Price HK$51.4 (+37.7% upside)
• Yili Industrial (600887 CH): Buy, Target Price RMB50.0 (+16.3% upside)
• Tsingtao Brewery (168 HK): Buy, Target Price HK$86.0
• RLX Technology (RLX US): Buy, Target Price US$6.9

Valuation Overview

• MSCI China Consumer Staples Index: Trading at 23.0x 2022E P/E
• Valuation Adjustments:
  • CRB, Mengniu, Tsingtao: Target prices are set +1sd above 3-year average for CRB and Mengniu, and at 3-year average for Tsingtao.
  • Smoore and RLX: Target prices are set -1sd below 3-year average, reflecting regulatory uncertainties.

Structural Drivers for F&B Companies

• Habitual Consumption: F&B demand is relatively inelastic due to consumer awareness of food quality and taste.
• Premiumization: Companies are improving product quality and focusing on premium segments, which helps in maintaining margins.
• Cost Pass-Through: Effective cost management and price hikes help in offsetting inflationary pressures.

Impact of Cost Inflation

• Electricity Tariff Hike: Expected to have uneven impact on margins, with beer producers suffering the most due to high packaging costs.
• Raw Milk Price Hike: Likely to peak in 2021, with Mengniu and Yili taking proactive steps to secure supply.
• Packaging Cost Sensitivity: A 10% increase in packaging cost could lead to a 0.1–1.0% decrease in gross margins for selected companies.

Market Trends and Consumer Behavior

• Household Income Growth: Remains a strong driver for consumption, with an 8.4% CAGR over the past decade.
• Consumption Correlation: Food expenditure has a stronger correlation with income than with property investment gains.
• CGB Dynamics: Products with high channel margins and low product differentiation are more vulnerable to channel migration.

Summary of Investment Highlights

• CR Beer: High-quality with strong premiumization and pricing power.
• Mengniu: Effective cost control and robust EBIT margins.
• Smoore: Regulatory challenges but also a barrier to new entrants.
• Yili: Similar to Mengniu, with a focus on premiumization and cost management.
• Tsingtao: Strong fundamentals and potential for growth.
• RLX Technology: High valuation risk due to regulatory scrutiny but still recommended.

Conclusion

Despite the challenges posed by supply chain bottlenecks, property tightening, and stagflation expectations, the China Consumer Staples sector offers resilience and growth potential through premiumization, habitual consumption, and effective cost management. Investors are advised to focus on companies with strong pricing power and stable margins.