20131203-富瑞金融香港公司-China_Consumer_2014_Outlook-It_s_All_About_Spending_227页_6mb

China Consumer 2014 Outlook Summary

Core Content

This document outlines the outlook for the Chinese consumer sector in 2014, focusing on the impact of the 3rd Plenum reform, agri-supply conditions, and the evolving retail and e-commerce landscape. It also provides insights into key subsectors such as staples, retail, sportswear, apparel and footwear, and jewellery, along with specific company recommendations and valuations.

Main Points

1. 3rd Plenum Reform Implications

• The reform aims to drive long-term growth and prosperity through comprehensive changes, including farmland reform and taxation reform.
• Farmland Reform:
  • Grants farmers equal property rights and promotes urbanization.
  • May lead to increased consumption of F&B products, processed meat, and dairy due to improved farmer incomes.
  • Facilitates large-scale agri-product production, stabilizing prices and reducing cost pressure on downstream companies.
• Taxation Reform:
  • Aims to support well-run companies and reduce the tax burden on low-income individuals.
  • Expected to improve consumer sentiment and benefit the consumer discretionary sector.

2. Agri-Products and Food & Beverage (F&B) Sector

• Most major agri-products saw price declines in 2H13, with stable or rising stock-to-use ratios.
• Agri-prices are expected to stabilize or rise mildly in 2014, aiding margin expansion for F&B companies.
• Raw Milk Powder:
  • Prices have surged due to lower inventory and unfavourable weather.
  • Expected to continue rising in 2014, benefiting upstream dairy farms and integrated companies.
• F&B Sector Outlook:
  • Positive due to improved agri-supply, low inflation, and potential consumption upgrades from land reform.
  • Key catalysts: lower agri-prices, stable macroeconomic conditions, and favorable weather.
  • Key risks: higher agri-prices, slow policy implementation, and food safety issues.

3. Retail Sector

• Retail sales growth has been range-bound at around 13% in 2013, below the 2012 level of 14.3%.
• Expected to recover moderately in 2014 due to improving macroeconomic conditions, rising consumer sentiment, and policy implementation.
• E-commerce Impact:
  • Traditional retailers face significant challenges due to competition from online platforms.
  • Supermarkets with a high proportion of fresh food sales are less affected.
  • Key catalysts: faster M&A activity, rising consumer sentiment, and capacity reduction.
  • Key risks: irrational expansion, tight competition, and rising labor and rental costs.

4. Sportswear Sector

• The sector has been in a multi-year downturn but shows signs of recovery.
• Inventory turnover months have declined to 4–6 months from 8–9 months in 2011/12.
• Discount promotions are less aggressive, and ASP (average selling price) is expected to rise.
• Outlook:
  • SSSG (same-store sales growth) is forecasted to improve to 7–8% in 2014e.
  • Anta and Li Ning are expected to grow revenue by 10% and 12%, respectively.
  • Cotton prices are expected to drop, helping offset rising labor costs.
  • Key catalysts: better-than-expected SSSG, trade fair orders, and normalization of inventory.
  • Key risks: softening demand, faster rental and staff cost increases, and tight competition.

5. Apparel and Footwear Sector

• Suffering from a prolonged downturn, with sluggish growth.
• Outlook:
  • Negative due to structural challenges from e-commerce and aggressive expansion in lower-tier cities.
  • Expected to see only 3–6% new store growth in 2014e, down from 10–20% in previous years.
  • Key risks: softening demand, rising rental and staff costs, and tight competition.

6. Jewellery Sector

• Gold price is a major driver, but the outlook is neutral due to bearish trends.
• Gold Price Outlook:
  • Expected to drop to USD1,250/ounce in 2014e from USD1,450/ounce in YTD.
  • Rising interest rates and central bank selling are expected to reduce investment demand.
• Sector Outlook:
  • SSS decline of 3% and revenue growth of 5% are forecasted for 2014e.
  • Gross and net profit margins are expected to improve due to a shift in sales mix towards non-gold products.
  • Key catalysts: Q413 operations announcements, M&A activity, and gold price volatility.
  • Key risks: gold price decline, and rising rental and staff costs.

Key Recommendations

Top Picks

• China Resources Enterprise (291 HK): Buy
• Tingyi Holdings Corp. (322 HK): Buy
• Intime Department Store (1833 HK): Buy

Top Sells

• Belle International (1880 HK): UNPF
• Luk Fook Holdings (590 HK): UNPF

Key Companies and Valuations

Summary of Sector Valuation

• Staples: Trade at 23x 14ePE, below historical median of 24x.
• Retailers: Trade at 14x 14ePE, below historical median of 17x.
• Apparels: Trade at 13x 14ePE, below historical median of 18–20x.

Key Takeaways

• The 3rd Plenum blueprint is expected to benefit the consumer sector in the long run.
• F&B companies are likely to see margin expansion due to improved agri-supply and low inflation.
• Retail is expected to recover moderately in 2014, but structural issues remain.
• Sportswear shows signs of recovery with improved SSSG and ASP.
• Apparel and footwear face continued challenges due to e-commerce and cost pressures.
• Jewellery sector is neutral due to gold price trends.
• E-commerce is reshaping the consumer landscape, with mixed impacts across subsectors.