After two years of Battle Royale, big consumption makes a comeback.

Unlike the booming 2020, the trend of the consumer sector in the second and third years after the epidemic is completely different from before, with a cumulative drop of nearly 30% in the consumer sector in 21-22 years.For the past two years, the consumer sector has been hit repeatedly, and now we hear less and less about consumer upgrading. When it comes to consumption, we talk more about pessimistic information such as rising raw material prices and cost increases.

Dolphin Analyst believes that there are three main reasons for the cooling of the consumer industry: (1) the lack of consumer scenes under long-term control; (2) the damage of consumption ability; and (3) the decline of consumption willingness.

In December, policies were frequent. First, the "new ten measures" were introduced to further optimize epidemic prevention measures. Secondly, the National Health Commission adjusted the classification of COVID-19 infections from Class B Category A to Class B Category B. Finally, the National Immigration Administration announced that it will resume handling endorsements for mainland residents to travel to Hong Kong for tourism or business from January 8, 2023. In terms of consumption, the Central Economic Work Conference in 2022 specifically pointed out that the economic work in 2023 should "focus on expanding domestic demand and put recovery and expansion of consumption in a priority position".Boosting consumption demand has been put in the first place of the five major tasks of economic work in 2023. How can frequent policies boost confidence that has been damaged? This article will focus on when consumer confidence will be restored and which sub-sectors have investment value in the consumer sector in 2023.

Dolphin Analyst believes that, referring to the recovery experience of overseas countries, after a short period of chaos of about 3 months, consumption will generally show good recovery. Firstly, among many sub-sectors of consumption, the sectors related to catering should be the first allocation main line. Secondly, as the recovery progresses, the scenarios related to travel will also see data warming up. Finally, for some leading companies with industry pricing power, investment-level changes are more important than fundamentals, and the recovery of confidence is conducive to the repair of valuation of the liquor sector.

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I. Where does the recovery come from when consumption is cooling down?

As control policies gradually move towards complete opening up, various regions in China experienced the first wave of high infections around December 20 last year. After the New Year holiday, most people are now in a state of "post-infection recovery". Although everyone has obtained antibody "blessing," consumption recovery has not yet seen any signs, possibly because people are still in the process of physical recovery. As the first post-opening holiday, Dolphin Analyst made comparisons from three aspects: travel, tourism and other consumption. 1. Travel: According to data from the Civil Aviation Administration and the Ministry of Transport, the number of flights and passengers during this year's New Year's Day holiday was only about 60-70% of the same period in 2021, and only about 40% of the level before the pandemic in 2019.

2. Tourism: Except for some popular attractions such as Huangshan Mountain, the current domestic tourism can barely recover to the level before the pandemic. Generally, it is only about 50% of the pre-epidemic level.

3. Other consumption services: This year's total box office during the New Year's Day holiday was only 30% of 2020. The only bright spot is the catering industry. According to data from various catering associations and food delivery platforms, the activity, passenger flow, and sales of the catering industry continued to grow during the New Year holiday. On the first day of the holiday, the number of dine-in orders in Beijing, Shijiazhuang and other places doubled, and the number of takeaway orders increased by more than 70%.

Although the problem of "missing consumption scenes caused by policy control" has been solved, the speed of consumption recovery is not as ideal as expected. However, the difference in recovery among different sub-sectors also provides some ideas for us to choose. That is, the change in the catering sector is the most obvious, and we will discuss this in more detail later. What is more important to understand now is whether the situation of "non-consumption" will still occur even if epidemic prevention policies are optimized? This requires us to explore the other two problems of the cold consumption: whether "consumption power has been damaged" and whether "the reduced consumption willingness can be repaired."

Firstly, we observe the "reduced consumption willingness". According to the data of the urban household savings survey published by the People's Bank of China, the willingness of residents to save continues to rise, with more than 60% of respondents saying they will increase savings, reaching a new high since 2017. However, only nearly 20% of respondents are willing to increase their consumption. At the same time, looking at the future confidence index, the index for residents' expectations of income and employment exceeds 40%, which is still declining. Dolphin Analyst believes that the reason for this phenomenon is due to the damage to consumption mentality, rather than damage to consumption ability.

In fact, over the past two years, household savings in the resident sector has continued to increase, which is essentially caused by residents "saving". We can observe this mentality from the continuous increase in the willingness to save as mentioned earlier. In addition, we can also compare the per capita disposable income and per capita consumption expenditure of residents. Looking at the composition of per capita disposable income in the resident sector, per capita disposable income in the resident sector is divided into four main items: wage income, net operating income, net property income, and net transfer income. Among them, wage income, which represents wages and accounts for about 60% of per capita disposable income, and net operating income, which represents individual business owners and has decreased from 19% in 2013 to 16% today, are more closely related to the majority of "wage earners".

Over the past three years (from Q3 2019 to Q3 2022), per capita disposable income and wage income have both grown by 20% nationwide, but net operating income has only grown by 15%. This means that the operating capacity of individual business owners is obviously lagging behind, which will marginalize the fears of residents about declining confidence in income and the stringent epidemic prevention policies experienced in the first half of last year (such as the long-term epidemic prevention and control in first-tier cities such as Shenzhen and Shanghai). After more than two years of fighting the epidemic, individual business owners who have been struggling have already been seriously injured.

This also shows that residents have the ability to consume, but their consumption attitude has been damaged. This is also summarized by the People's Bank of China in the third quarter of 2022 monetary policy execution report, "This year, the total deposits of China's banking system have grown rapidly, and due to special factors such as the epidemic, residents' precautionary savings have increased", and "domestic residents' precautionary saving intentions have risen, limiting consumption recovery"'.

To summarize, we can see very clearly above that the net operating income, which is closely related to residents' disposable income, is not performing well, which has brought about damage to residents' consumption mentality. Due to the decline in expectations for the future, savings have increased while consumption behavior has also slowed down. This is very easy to understand because they do not know what to loosen, so investment and consumption are especially conservative.

And now, almost all epidemic prevention and control measures have been canceled, and benefiting from the overall relaxation of the consumption scene, customer traffic rebounding is basically an inevitable event. Even if the data weakens temporarily due to the sharp increase in infection rates in the short term, residents' consumption attitudes will gradually relax at least.

Although it has not yet returned to the pre-epidemic state, many bright spots have emerged, such as the congestion index of cities released by Baidu Map. Cities with rapid epidemic progress such as Beijing, Wuhan, Chengdu, and Chongqing have appeared in traffic congestion conditions during the week from December 26th to January 1st, and some chain restaurants such as Haidilao have even appeared waiting for a long time.

Whether it is the United States, Europe, or Japan, South Korea, and Vietnam in Asia, after the adjustment of epidemic prevention policies, there has been a "revenge" consumption with a significant increase in total demand. However, according to overseas experience, it basically takes about two quarters after restart to see a year-on-year increase, which exceeds or even surpasses the pre-epidemic state. But Dolphin Analyst believes that the situation in China may be different and is likely to be steeper than overseas.

On the one hand, the control before the opening in China was relatively strict and basically in a "one-size-fits-all" state, while regions like Japan have tried several times to "open up"-"outbreak"-"control" situation, so the potential demand backlog in China is relatively long.

On the other hand, the current domestic first wave of infection has just passed (there may be second and third waves later, according to the experience of Hong Kong, which has experienced about five waves of infection since the overall opening, averaging once every 2-3 months), according to research papers from the Chinese Academy of Sciences and the Shanghai Public Health Clinical Center, and this round of infections is believed to have come to an end in first and second-tier cities around the New Year.

The peak of the epidemic was delayed in the suburbs, appearing around mid to late January, just in time for the Spring Festival travel rush. The returning migrant workers are mostly "healthy" people from first and second-tier cities, whose physical condition gradually recovers and adds to the opportunity to return home, which is likely to accelerate the pace of consumer recovery. Moreover, after April, it will enter the peak season of tourism and business activities, such as Tomb Sweeping Day, May Day and other small holidays, so the "consumption recovery" in China is likely to only need one quarter to accelerate achievement.

Now let's look back at the three factors that contributed to the cool down in consumption. The first factor, the absence of consumption scenes, no longer exists. The second factor, consuming power, has not been greatly damaged, and "preventive savings" can serve as a source of support for future consumption. The third factor, consumption willingness, will become the final determining factor for the recovery rhythm, and the rebound in customer traffic of the catering industry in many places during New Year's Day basically indicates that the pessimistic expectations for the future are now relaxing.

Since consumption is likely to recover, what sector should be allocated at this time?

Part 2. The overheated catering industry is not recommended, beer is more secure

According to the experience of various countries overseas, the strongest rebound during the relaxation period is in catering consumption, which is easy to understand, as catering is the most affected by the epidemic control and directly affects the consumption scenes. Of course, the capital market has also reached a consensus. The share prices of catering-related HKEx stocks such as Jiuhaojiu, Helenbergh, and Nayuki Tea have rebounded by more than 50% in the past two months, and the current share prices have largely overdraft the future recovery expectation.

For example, in Dolphin's earlier article, "Jiuhaojiu (II): Can Jiuhaojiu, which is supported by Duoer, support the skyrocketing share prices?" we calculated that to achieve the final goal of 800+ stores and four turnovers for Jiuhaojiu, corresponding to a HKD 21.51 stock price assuming a perpetual growth rate of 3% and a discounting rate of 10%, which is obviously a huge challenge at this time. So, at this point in time, pursuing the catering sector again may carry a higher risk, Dolphin believes that beer is more cost-effective than catering industry now.

First of all, residents' willingness to dine out has strengthened, so the recovery of alcoholic beverages and drinks will be faster. Once the people flow rebounds, the repair of current drinking channels will directly promote the recovery of beer sales. Secondly, because current drinking products are mostly concentrated in nightclubs, catering and other channels, the products tend to be high-end and ultra high-end, which not only contributes to consumption, but also drives up the average consumption price, which is a logic of synchronous increase in quantity and price.

The performance of beer during the World Cup in November shows that after a long period of epidemic prevention and control, people have a strong desire for gatherings with friends and family. Moreover, this year, the drop in packaging material costs in the beer industry can help relieve cost pressures and restore gross margins. Therefore, compared with the catering industry, which needs to restore passenger flow and reopen stores at a faster pace, beer or other drinks may be a more stable and happy choice for investors.

In terms of choosing specific targets in the subdivided industry, you can refer to Dolphin Analyst’s previous beer industry overview, “Tsingtao Beer and Chongqing Beer: Beer “Old Guns” Transform into Consumption “Clear Streams” (https://longportapp.cn/topics/3712721). Among the many listed beer companies, Dolphin Analyst pays more attention to Tsingtao Beer, which benefits from rising ton prices, and small and beautiful Chongqing Beer is also a good choice.

Three, Recovery of Travel Scenes, "Appearance" Economic Recovery

In addition to catering, the recovery of travel scenes is still one of the very clear allocation themes in the subdivided consumer sector. However, the travel scenes referred to by Dolphin Analyst not only include the traditional hotel industry, but also the possibility of sports brands.

In terms of traditional travel, in the previous total number of the hotel industry, Dolphin Analyst analyzed that although the rebound in the hotel industry's recovery is likely to be slightly slower than that of the catering industry, the improvement in occupancy rates will almost inevitably lead to an increase in ADR. Such features have been reflected in several cycles of the hotel industry in the past, which is also a "quantity-price increase" logic. For specific target selection criteria, you can refer to the hotel industry overview, "Rising 75%, How has Huazhu faith been developed? (Part 1)" (https://longportapp.cn/topics/3754634). Hotel leaders such as Huazhu not only have the resilience to recover, but also have the logic of further concentration.

In recent grassroots research, Dolphin Analyst also learned that the epidemic prevention and control last year has hindered the expansion of major hotel groups, so leading companies such as Huazhu are relatively cautious in their opening plans and value quality over quantity. However, epidemic prevention policies have already been optimized. Thanks to the rise in occupancy rates and adr, hotel leaders are likely to resume their pre-epidemic opening speeds, which means they may outperform Dolphin Analyst's optimistic expectations mentioned in the hotel industry overview (Part II) "Can Huazhu at $43 still sprint to the top?". Therefore, Huazhu's share price still has more than 30% upside potential.

In addition, Dolphin Analyst wants to share some ideas on the sub-sectors of sports brands. In the past two years, sports brands have been particularly bleak, not only in physical business, but also in the Hong Kong stock market, Li Ning and Anta, whose performance has not fallen much, but whose valuations have fallen by half, mainly due to pessimistic expectations for passenger flow.

In the last two quarters of last year, some regions in China experienced repeated epidemics, highlighting pressure on downstream demand. However, this time, the textile industry is already in the mid- to late-stage of de-stocking.

However, among the various brands in the sports segment, Li Ning's inventory optimization is clearly better than its industry peers, while Anta still faces some pressure.

According to grassroots industry research, as of the end of December, Nike's inventory-to-sales ratio was about 5.5, which was healthier than that of November, indicating that inventory has returned to normal levels that can be controlled.

Dolphin Analyst believes that although the short-term increase in infection rates will cause some disturbance to terminal sales in the past two months, logically speaking, the recovery of travel scenes will inevitably revive consumers' pursuit of "beauty". The clothing and medical beauty industries related to it will probably have a wave of opportunities. Among the clothing segment, Li Ning, which has better inventory de-stocking performance, is clearly a better choice. You can look forward to Dolphin Analyst's in-depth report on Li Ning in the future.

IV. Confidence recovery, and white wine also has opportunities

Finally, Dolphin Analyst also wants to make a point that most of the time, compared to the fundamentals, changes in investment-level psychological margins need to be given more attention. As the largest sub-sector in consumption, the valuation of white wine often serves as an anchor for the valuations of other consumer sub-sectors. In terms of the actual effect of the recovery, white wine may not be as elastic as other sub-sectors, but the valuation of white wine is closely related to macroeconomics. This is also why the largest decline in the white wine sector since 2021 has exceeded 40%, and after economic stabilization and the marginal changes in real estate policies, it is expected to bring some degree of valuation repair to the white wine sector.

According to the recent survey of major domestic liquor dealers in some provinces, the high-end liquor payment situation is still better than that of the second-tier. From the perspective of target selection, under the background of economic expectations, a stable high-end liquor may be a better choice. However, since the current liquor valuation is still at the median level, there is still a small space away from the opportunity area.

Therefore, it is better to choose the ones with safer and more attractive valuations as well as the ability to continue to maintain stable growth. This is also why the Dolphin Analyst purchased a part of Wuliangye half a month ago.

V. How to choose consumption

By combing through various subdivided scenarios of the consumption industry, the Dolphin Analyst believes that although the consumption may face certain pressures in the short term due to the outbreak in various regions, the three factors that suppress consumption have changed in the medium and long term. In the future, consumption scenarios and confidence will gradually recover, and it is still a suitable time to continue to lay out consumption recovery.

Moreover, due to the strict domestic epidemic prevention measures and the long time, coupled with the upcoming Spring Festival, the consumption speed in China may accelerate in the next month. Therefore, among many consumption segments, the following companies are considered to be relatively good choices.