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Food and Beverage Industry H2 2023 Investment Strategy

H1 2023 Underperformance

• Performance of profit-driven stocks lagged valuation-driven stocks due to:
  • Macroeconomic volatility, impacting manufacturing income and profit, particularly for food and beverage firms using discounted future cash flow valuation.
  • RMB depreciation against USD, driving capital to higher-yielding currencies and favoring small-cap stocks with low international capital exposure.

H2 2023 Outlook

• Core factors to watch:
  1. Company profitability, influenced by CPI-related terminal price changes.
  2. Consumer capacity and willingness affecting demand.
  3. Macroeconomic recovery impacting consumption sentiment.
• Overall view: Demand rebound is expected with consumption scenarios reviving. A stable macroeconomy and RMB could improve valuation, supporting positive investment opportunities.

Investment Strategy

• Focus on micro factors:
  1. Dealer inventory cycles, which can delay industry recovery.
  2. Gross sales difference (gross margin-sales ratio), which affects profitability.
• Sector focus: Consumer discretionary areas (e.g., second-tier liquor) offer higher elasticity; industries resilient to cost reductions (e.g., beverages) may show better profit gains.
• Key recommendations: Strongly recommend companies like Guizhou Moutai, Wuliangye, Gǔjīng Guójìng Jiǔ, Anning Food, and Yili.

Risks

• Economic recovery slower than expected.
• Changes in COVID-19 policies affecting consumption.
• US-China relations deteriorating with economic implications.