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China Consumer Sector Summary

Core Content

The China Consumer Sector report from CMB International Global Markets highlights sustained growth in the Consumer Discretionary segment, particularly in Shenzhen, and provides insights into various sub-sectors such as catering, sportswear, tourism (hotels), and home appliances. The report maintains an OUTPERFORM rating for the sector and identifies specific companies with BUY or NOT RATED recommendations.

Main Trends

• Post CNY Sales Growth: Robust sales growth continued in February 2023, with some companies reporting better performance than in January 2023. The recovery from the impact of COVID-19 is still ongoing.
• Spending Per Customer: Increased customer spending is evident, with improved retail discounts in sportswear brands and higher ADR (Average Daily Rate) in hotel brands.
• Segment Recovery: Luxury, experience-based, and value-for-money segments are rebounding better than others. Notably, mid-high end hotel brands and catering brands are showing strong SSSG (Same-Store Sales Growth) performance.

Key Sub-sectors and Performance

OUTPERFORM Sub-sectors:

1. Catering: Brands like Haidilao and Song Hotpot are showing recovery, with the latter gaining market share due to a younger, more fun brand image.
2. Sportswear and Apparel: Brands such as Anta, Xtep, and Bosideng are performing well, especially those with outdoor and fitness-related products.
3. Tourism (Hotels): Atour and XBXB are leading in this segment, with strong RevPAR (Revenue Per Available Room) growth and ADR increases.

MARKET-PERFORM Sub-sector:

• Home Appliances: This segment is rated as MARKET-PERFORM, indicating it is expected to perform in line with the broader market.

Top Picks and Ratings

• XBXB (520 HK, BUY): Strong CNY SSSG of 24%, with potential for margin improvements. The group expects to open 120 new stores in FY23E.
• YUMC (9987 HK, BUY): Positive outlook due to strong consumer demand and recovery in the fast-casual dining sector.
• CDC (341 HK, BUY): Seen as a strong performer in the catering sector.
• Anta (2020 HK, BUY): Gaining traction in the sportswear market with a focus on outdoor and fitness.
• Xtep (1368 HK, BUY): Strong retail sales growth in Shenzhen, supported by healthier inventory levels and reduced retail discounts.
• Bosideng (3998 HK, BUY) and JNBY (3306 HK, BUY): Both are recommended for their performance in the apparel sector.
• Atour (ATAT US, NR): Shows strong RevPAR recovery, with a 103% recovery rate vs 2019. The brand's superior value proposition and piled-up demand are key drivers.
• Gree (000651 CH, NR): Not rated but is mentioned in the context of the broader consumer sector.

Insights from Experts

• Catering: Haidilao had a table turnover of 3.2x during CNY, slightly below the industry average. The brand is facing challenges such as aging customer base and lack of innovation. However, Song Hotpot and Banu Maodu Hotpot are gaining ground with a younger and more vibrant brand image.
• Hotel Sector: Atour has exceeded expectations in Feb 2023, with OCC (Occupancy Rate) at 95%+ and ADR rising to ~RMB 800. The brand's superior brand equity and price to quality ratio are key factors in its success.
• Retail Sales: The Shenzhen flagship store of Xtep reported 20-30% retail sales growth in Jan-Feb 2023, showing resilience post CNY.

Financial and Operational Outlook

• XBXB and Cou Cou: Expect GP margin to return to FY19 levels due to in-house meat processing. Rental expenses are projected to decrease to 11-12% and 10% for FY23E, respectively.
• Staff Costs: While certainty pressure exists due to minimum wage increases, improved store productivity may help reduce staff costs to 20% and 25% by FY24E.
• Capex Reduction: The use of in-house design teams could reduce capex per store per sq m to RMB 7,000 and RMB 4,500, improving OP margins to ~20% and ~16% for XBXB and Cou Cou, respectively.

CMBIGM Ratings

• BUY: Indicates potential return of over 15% over the next 12 months.
• HOLD: Indicates potential return of +15% to -10% over the next 12 months.
• SELL: Indicates potential loss of over 10% over the next 12 months.
• NOT RATED: Indicates the stock is not rated by CMBIGM.

Analyst Certification

The report is prepared by Walter Woo, who certifies that the views expressed are his personal views and that there are no conflicts of interest. The analyst also confirms that he has not traded in the stocks covered in the previous 30 days and will not trade within 3 business days of the report's release.

Important Disclosures

• Investment Risks: There are risks involved in trading any securities. The report is not investment advice and should not be relied upon for individual decisions.
• Confidentiality: The report is for intended recipients only and may not be reproduced or distributed without prior written consent.
• Legal Restrictions: The report may not be provided to certain investors in the UK, US, and Singapore without specific authorization.

Conclusion

The China Consumer Discretionary Sector is showing strong recovery and outperformance in the post-CNY period. Key sub-sectors such as catering, sportswear, and tourism are performing well, with XBXB, YUMC, Anta, Xtep, and Bosideng being the top picks. The report emphasizes the importance of brand equity, cost management, and customer behavior in driving future growth.