20220121-招银国际-China_Consumer_Staples__Cherry-picking_amid_a_de-risking_mentality_our_top_picks__CRB__Mengniu__Feihe_46页_2mb

China Consumer Staples Sector Update Summary

Core Content

This report provides an equity research update on the China Consumer Staples sector, focusing on the impact of macroeconomic factors, regulatory reforms, and price hikes on the performance of key companies. The analysis highlights the importance of relative defensiveness, pricing power, and product mix upgrades in maintaining profitability amid rising input costs and a de-risking market mentality.

Main Points

• Macro Challenges: The ongoing effects of property deleveraging and the zero-COVID policy are expected to persist and negatively impact consumption sentiment. These factors are likely to act as headwinds alongside other economic challenges.

• Price Hikes as a Catalyst: Companies that implement price hikes and product mix upgrades are seen as more resilient and capable of generating positive short-term returns. The analysis shows that price hikes have historically led to meaningful stock rallies.

• Sector Performance: F&B (Food and Beverage) companies show a low correlation to macroeconomic shocks, offering a relative defensive position. However, the recent regulatory reforms have led to earnings revisions, especially for Smoore and RELX.

• Investment Thesis: The structural drivers for F&B companies include habitual consumption, premiumization, and effective cost pass-through, which help in maintaining stable margins despite input cost inflation.

Key Information

Our Top Picks

• CR Beer (291 HK): Expected to deliver the highest margins expansion potential due to product premiumization and capacity optimization.
• Mengniu (2319 HK): Maintains a strong position with a recurring OPM of 5.4% and a positive outlook for 2022E with 13% top line growth.
• Feihe (6186 HK): Demonstrates solid, though slower, premiumization progress and new product launches, despite the challenges in the infant formula segment.

Earnings Revisions

• CR Beer: Maintained forecasts, with a revised volume growth of -0.7% for 2021E.
• Mengniu: Maintained forecasts, with a revised 2021E net profit forecast.
• Smoore and RELX: Net profit forecasts cut by 2-26% due to regulatory reforms.
• Feihe: Earnings cut by 8% / 14% for 2021/22E upon coverage transfer.
• Budweiser and Nongfu Spring: Revenue and net profit forecasts slightly below consensus.

Valuation Summary

Investment Highlights

• CR Beer: The company is expected to deliver the highest margins expansion potential, supported by product premiumization and capacity optimization. Despite a slower volume growth, the positive EBIT growth remains intact.
• Mengniu: Maintains a strong position with stable raw milk prices and selective price hikes in 2022. The company is expected to achieve a 13% top line growth in 2022E.
• Feihe: Faces a relatively gloomy industry outlook but is expected to perform well with solid premiumization progress and new product launches.
• Budweiser: Anticipated to increase prices and improve EBITDA margins, with volume growth expected to recover to 2019 levels.
• Nongfu Spring: Likely to face GPM pressure due to higher raw material costs, but maintains a long-term NPM target of 20%+.

Market Outlook

• Price Hikes: Expected to drive near-term positive returns, with breweries likely to revise pricing strategies in 2Q22 ahead of the summer peak season.
• Macro Risks: The de-risking mentality and regulatory reforms are significant headwinds, but companies with strong fundamentals and pricing power are expected to outperform.
• Valuation Considerations: The report suggests a preference for low valuation stocks, as they are less sensitive to valuation risks, especially in the context of potential US rate hikes.

Conclusion

The China Consumer Staples sector faces macroeconomic and regulatory headwinds, but companies with strong pricing power, product mix upgrades, and effective cost pass-through are expected to maintain relative defensiveness and deliver positive returns. The revised pecking order includes CR Beer, Mengniu, and Feihe as top picks, followed by Nongfu Spring, Tsingtao, Yili, and Budweiser. Investors are advised to consider these companies for their potential to outperform amid the current market environment.