Short-term Outlook: The food and beverage sector is expected to experience a short-term rebound, but not a full turnaround. Mass consumer demand is expected to improve slightly, while product mix upgrades will continue in the mid-to-long run.
Dairy Products: Positive outlook as they are entering a recovery cycle. High-end instant drinking tea, mid/low-end water beverages, and energy/sports drinks are showing improvement.
Cost Pressure: 2017E is expected to bring increased cost pressures, with PET, sugar, palm oil, and Fonterra milk powder prices rising significantly YoY.
Stock Selection Strategy: Companies with strong cost transfer capabilities are favored. Key sectors include:
Downstream Dairy Companies: Expected to see less price competition due to improving competitive landscape.
Red Wine: Discretionary in nature and has strong price-hiking capability.
Health Products: Consumers are less sensitive to price increases due to their health benefits.
Infant Formula: Expected to improve in 2H17 due to the second child policy and infant formula registration system.
Key Recommendations
Company
Ticker
Rating
Target Price (HK$)
Mengniu Dairy
2319 HK
BUY
16.5
China Foods
506 HK
BUY
4.4
Biostime
1112 HK
BUY
23.7
Tingyi
322 HK
BUY
11
Uni-President China
220 HK
NEUTRAL
4.7
Hengan International
1044 HK
NEUTRAL
68.2
Financial Highlights (Selected Companies)
Company
Revenue CAGR (2016-18E)
Operating Profit CAGR (2016-18E)
Mengniu Dairy
7%
16.7%
China Foods
9%
50%
Tingyi
3%
43%
Catalysts
ASP Hikes: Price increases in products are expected to drive performance.
Innovations: New product development and market expansion are key growth drivers.
Market Trends
Mass Consumer Goods: Growth is tied to infrastructure construction. Short-term improvement is expected due to the rebound in infrastructure investment.
FMCG Recovery: While short-term stabilization is observed, long-term growth depends on product mix upgrades.
Cost Pressures: 2017E is expected to see a rise in raw material costs, which may impact profitability unless companies can effectively transfer these costs to consumers.
Investment Ratings
Rating
Definition
OVERWEIGHT
Expect sector to outperform the market over the next 12 months
NEUTRAL
Expect sector to perform in-line with the market over the next 12 months
UNDERWEIGHT
Expect sector to underperform the market over the next 12 months
BUY
Expect stock to generate 10%+ return over the next 12 months
NEUTRAL
Expect stock to generate +10% to -10% return over the next 12 months
SELL
Expect stock to generate loss of 10%+ over the next 12 months
Analyst and Regulatory Disclosures
Analyst Disclosure: Views in the report reflect personal opinions and not influenced by compensation.
Regulatory Disclosure: Information is for reference only and may not be suitable for all investors.
Disclaimer: The document is not an investment recommendation and is not guaranteed to be accurate or complete.
Important Disclosures for U.S. Persons: The report is provided to "major U.S. institutional investors" and not to the general public. U.S. persons should use it only through a registered broker-dealer.
Summary of Key Insights
The sector is expected to show short-term improvement but not long-term turnaround.
Companies with strong pricing power and cost transfer capabilities are recommended.
The recovery of the dairy sector is anticipated, driven by high-end product demand.
Red wine and health products are highlighted for their potential to benefit from price hikes and consumer interest.
Infrastructure growth is a short-term catalyst for mass consumer goods.
Raw material cost increases are expected, impacting profitability unless mitigated by pricing strategies.
Investment decisions should be based on personal evaluation and independent financial advice.