Throughout 2022, the domestic epidemic prevention policies have deeply influenced domestic consumer behavior and the stock market. With the comprehensive shift of the end-of-year epidemic prevention and control policies, the short-term impact of the epidemic transmission caused by the relaxation of control, and the recovery of the consumer scene next year, it will also deeply affect the trend of China's assets (especially pan-retail companies) in 2023.

So, what will be the order, rhythm, and intensity of the recovery of the various sub-sectors of domestic consumption after the release? To answer this question, Dolphin Analyst found through reviewing the typical post-epidemic consumption recovery rhythms in the United States and Japan:

① After the relaxation of epidemic prevention and control, commodity consumption will lead the recovery and quickly return to the pre-epidemic level (among which the rebound strength of optional consumption is relatively strong, and the actual changes of necessary commodity consumption before and after the epidemic are not significant). Service consumption, on the other hand, will have greater resilience due to the more severe damage it suffered during the epidemic. But at the same time, the recovery speed of service consumption is slower, and it takes longer to fully recover.

② The speed and intensity of the post-epidemic consumption recovery in the United States and Japan are not the same. The United States has experienced a great prosperity in consumption post-epidemic, while Japan only recovered to the pre-epidemic level. The reason behind this is due to the different government stimulus, growth in residents' income, and consumption habits of the two countries. With fewer direct subsidies from the domestic government to residents, although residents’ income during the epidemic has declined, and there have been considerable excess savings between epidemics, the characteristic of low domestic residents' consumption willingness implies that the domestic consumption in 2023 is likely to be a repair. To move towards prosperity will require more policy stimulation.

③ In addition, based on the past experience of China and the United States, online and offline consumption show a clear inverse relationship. When the overall consumption market recovers, the growth rate of online consumption will slow down significantly.

According to the above judgment, Dolphin Analyst believes that next year, the performance of Internet companies primarily focusing on service consumption will be advantageous, such as Ctrip (OTA platform), Didi Chuxing, China Duty-Free Group (duty-free consumption), and Meituan (in-store services). On the other hand, Internet companies focusing on online commodity consumption will transform from a relatively dominant position during the epidemic to a relative disadvantage. The most they can do in the online retailing sector is to “choose the best from the worst” - to select companies that have below-market expectations and have a reverse logic, and platforms focusing on optional consumption will have a relative advantage (Alibaba).

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I. Recovery of commodity and service consumption is not immediate

1. The United States: The strongest case of consumption recovery after the epidemic

First of all, from the spread of the COVID-19 epidemic, the United States has experienced five major epidemic peaks since 2020. However, in terms of epidemic prevention policies, strict control measures were only implemented during the first two epidemic peaks in the United States. Since April 2021, epidemic prevention measures have begun to be relaxed continuously. Although there have been multiple epidemic relapses later, epidemic prevention measures have not been tightened again.

From the impact of several outbreaks on consumption in the United States, it can be seen that the impact of the epidemic on commodity consumption is relatively limited. Although the peak of the epidemic may cause a temporary decline in commodity consumption, the consumption of essential products such as food, beverages and daily necessities changes very little before and after the epidemic, reflecting a strong and minimal impact from the epidemic.

As for optional consumer goods such as clothing, furniture, and home appliances, they are subject to relatively more significant impact from the epidemic. Each time there is an outbreak, the consumption of optional consumer goods will decline. However, after the US government gradually relaxed its epidemic prevention policies in April 2021, the subsequent three larger-scale epidemic peaks had a relatively minimal impact on optional consumer goods than the previous two epidemic peaks. Therefore, Dolphin Analyst believes that the spread of the epidemic is not a key factor affecting optional consumer goods, and the strictness of epidemic prevention policies and the recovery of consumption scenarios have a more direct impact on optional consumer goods.

From the perspective of the recovery strength of consumption after the epidemic, essential consumer goods were less affected during the epidemic, so their rebound strength is also the weakest after the epidemic. As shown in the chart below, the growth rate of food, beverages, and daily necessities consumption in the United States has remained in the range of 0% to 15% before and after the epidemic, with limited room for growth.

In contrast, optional consumer goods rebounded significantly after the relaxation of epidemic prevention policies. After significant damage in the early stages of the epidemic, clothing consumption in the United States maintained year-on-year growth of more than 20% from 2021 to 2022, with a longer rebound time and strength.

However, as the prospects for US consumption and economic growth began to weaken in the middle of 2022, essential consumer goods still maintained a growth rate of 5% to 10%, while the growth rate of optional consumer goods such as clothing and appliances quickly fell to around 0%. Defensive essential goods and offensive optional goods belong to a simple but effective rule.

As for offline travel and entertainment-related consumption, the impact of epidemic transmission and epidemic prevention policies is even more significant. Every time there is a peak in the US epidemic, restaurant consumption and hotel occupancy rates will significantly decline, and the recovery of service consumption after the epidemic is also slower.

After the peak of the epidemic, commodity consumption will rebound in a V-shape, and can quickly recover to its pre-epidemic level. However, the recovery of service consumption belongs to the "hook-shaped" type, and the speed of recovery is slower. As of September 2022, service consumption by US residents has only recovered to 117% of the level of the same period in 2019, while commodity consumption has reached 137% of the pre-epidemic level.

But if you look at it from a different perspective, the greater impact of the epidemic means that there is more room for the recovery of service consumption, and the slower recovery speed also means that the service consumption recovery will last longer. Looking at the situation in the United States, after the commodity consumption resumed to the pre-epidemic level in 2021, the subsequent growth curve quickly flattened; while the service consumption still shows an upward trend of repair.

Japan: The consumption recovery of the epidemic prevention excellent student is relatively inferior.

Different from the United States, which lifted the epidemic prevention and control early, Japan is a country with relatively strict prevention and control, and the epidemic transmission is also well controlled. It is closer to the domestic epidemic prevention ideas and also demonstrates a different post-epidemic consumption recovery path from the United States.

Looking at the epidemic situation and prevention and control measures, Japan only began to gradually relax its prevention and control measures at the end of 2021, and only fully lifted the domestic prevention and control policies after the omicron first diagnosed peak from February to April 2022. However, due to the relaxation of prevention and control, Japan experienced a more serious epidemic peak in the middle of 2022. The current situation in the country also belongs to the climbing period after the relaxation of prevention and control, and the subsequent recovery can refer to the current performance of Japan.

First of all, for physical commodity consumption, Japan's situation is similar to that of the United States. For example, the growth rate of essential consumption, such as food, changed very little before and after the epidemic, while optional consumption, such as clothing, was significantly damaged during each epidemic outbreak. However, after the Japanese epidemic situation began to improve in September, clothing consumption expenditures grew rapidly and exceeded the pre-epidemic level. It can also be seen that with the relaxation of prevention and control measures and the passing of the period of the most severe epidemic situation, optional consumption will usher in a relatively strong rebound.

As for service consumption, although Japan experienced two most severe epidemic transmission peaks in 2022, in fact, whether it is transportation, catering, hotel check-in, and the number of tourists, they have shown an upward trend after the relaxation of prevention and control measures in March 2022. Also, with the opening of prevention and control measures and the recovery of consumption scenarios, even if the epidemic is severe, service consumption still shows a trend of recovery.

In general, the similarities between the US and Japan in terms of post-epidemic consumption recovery are:

Commodity consumption is less affected by the epidemic impact and rebounds quickly after the epidemic. Among them, necessary consumption is less affected by the epidemic, while optional consumption has more obvious cyclical characteristics of being damaged first and rebounding later;
Service consumption suffered greater damage before the epidemic, and the recovery space is also larger after the epidemic, but the recovery process is slow rather than explosive, and it takes a long time to fully recover. In addition, the impact of epidemic prevention policies on service consumption is greater than that of the epidemic itself;
According to the different recovery rhythms of various types of consumption before and after the epidemic, physical consumption and service consumption are relatively superior and inferior in each stage: ① At the outbreak of the epidemic, necessary goods> Optional goods> Service consumption; ② After the peak of the epidemic, commodity consumption quickly rebounded, while service consumption recovered slowly, at this time, optional commodity consumption> Required commodity> service consumption; ③ in the middle and late stages of consumption recovery, commodity consumption has entered a steady growth, while service consumption is still in a repair situation, at this time, service consumption> commodity consumption.
From the experience of various countries overseas, after the epidemic prevention and control measures are relaxed, it will lead to multiple peaks of epidemic transmission. Follow-up epidemics will still have a certain but more mild impact on consumption.

Second, the advantages and disadvantages of post-epidemic recovery and income and consumption willingness are key factors.

But in addition to the above common rules of post-epidemic consumer recovery, we can also see that the speed and height of Japan's consumer recovery are clearly lower than those of the United States. By September 2022, the per capita consumption expenditure of US residents is 121% of the same period in 2019, while the consumption expenditure of Tokyo residents in Japan is only 95% of the same period before the epidemic. In short, Japanese consumption is only repairing so far, while US residents' consumption has not only restored, but also walked out of a wave of prosperous growth after the epidemic.

Dolphin Analyst believes that the rhythm and strength of consumer recovery in the United States and Japan are different. First and foremost, the timing of the relaxation of epidemic prevention in the United States is earlier and more decisive. However, in addition to the different rhythms of epidemic prevention relaxation, the different income growth, savings, and consumption habits of residents in Japan and the United States have also led to different post-epidemic consumer recoveries in the two countries.

Specifically, in the three stages of the outbreak, early recovery, and late recovery, the government's large-scale cash subsidy issuance, the sustained increase in residents' income, and the release of excess savings are the three factors that have successively exerted force, which is an important reason why the United States can quickly prosper after the epidemic.

Firstly, during the epidemic, the US government issued a large amount of cash subsidies to residents, with a total scale of up to 870 billion US dollars, equivalent to 2,600 US dollars per capita. Therefore, the income and balance sheet of US residents did not deteriorate due to the epidemic impact, but instead reached a peak of per capita income and deposits.
After the relaxation of epidemic prevention and control and the decline of cash subsidies, the scarce labor market and continuously growing wage income became the driving force for the sustained growth of consumption in the United States.
The habit of excess savings and high consumption but low savings accumulated by US residents during the epidemic has become the main driving force for the later stage of US consumption recovery. However, it is also necessary to note that as the excessive savings of US residents are gradually consumed, the situation where future consumption expenditure continues to exceed income is likely to reverse. **

In contrast, the income and consumption of residents in Tokyo, Japan have been fluctuating since 2020 and there is no obvious trend of growth. The per capita savings of Tokyo residents has been continuously increasing, indicating that Tokyo residents are more willing to save than to consume. Therefore, due to the stagnation of income growth, low consumption, and high savings habits of Tokyo residents, the consumption recovery after the epidemic is also significantly weak.

3. What is the path of China's consumption recovery?

1. How far has the domestic epidemic prevention and consumption recovery gone?

With China also starting to relax its epidemic prevention measures and entering an epidemic outbreak period, where has the current consumption recovery reached domestically? First of all, for commodity consumption, both optional and necessary consumption have been affected under the impact of the epidemic. Among them, optional consumer goods such as clothing and household appliances have already fallen below the scale before the epidemic.

The damage to catering is slightly higher than that of optional consumer goods, falling back to 89% of the pre-epidemic scale in November 2022. As for transportation and travel, which is illustrated by airport passenger flow, the damage is very serious, currently only 28% of the pre-epidemic level, and the damage is similar to the first outbreak in 2020 and the static management in Shanghai at the beginning of 2022. To sum up, domestically, the country is currently in the stage of the most severe impact of the epidemic on consumption.

2. After the relaxation of prevention and control, more stimulation is needed for prosperity

Firstly, the Chinese government lacks direct subsidies to residents. During the epidemic, the United States government issued an average of about 2,600 US dollars (about 18,000 yuan) in cash subsidies per person, while Japan also issued about 200,000 yen (about 10,000 yuan) in subsidies to residents nationwide. In contrast, currently, only a few cities in China offer small non-direct subsidies to residents through consumption vouchers.

From the perspective of residents' income, although China's residents have a relatively high absolute growth rate in income during the epidemic due to its high economic growth center, as of the third quarter of this year, disposable income of domestic residents has exceeded 17% of the same period in 2019. In comparison, the full-year income in the United States exceeded the pre-epidemic level by 12% as of the end of November, while Japan's per capita disposable income was only equal to that before the epidemic. But the growth rate of disposable income for residents in China has been around 8% before the epidemic, and the highest level has only recovered to 6.3% after the epidemic impact, and then it has all the way down to around 5.5%. Comparing with history, vertically looking at the growth rate of disposable income of Chinese residents, it has dropped more than 2% after the impact of the epidemic, and has not yet recovered, and is still declining further.

Finally, from the perspective of savings, Chinese residents have accumulated a considerable amount of excess savings in 2022, which can support the recovery of consumption. However, the willingness to consume is not high, and how much can be released in the future depends on the change of residents' consumption attitude. In the past three years from 2019 to 2021, the total new savings added by residents in China in the first 11 months of each year has been maintained at around 10-11 billion trillion, but this year, nearly 15 billion trillion new savings have been added, indicating that the excess growth of savings scale has reached 4-5 billion trillion.

As for the source of excess savings, one is that Chinese residents have actively reduced consumption. As can be seen from the following figure, after the outbreak of the epidemic, the growth rate of domestic residents' consumption expenditure has been significantly lower than that of disposable income. On the other hand, it is also because domestic residents have shrunk their consumption expenditures on housing. By the end of November, the amount of new housing transactions across the country in 2022 was only 10.4 trillion yuan, a decrease of 4.1 trillion yuan compared with 2021. In terms of structure, most of the excess savings still come from the shrinkage of housing expenditures.

With the relaxation of epidemic prevention and control, Dolphin Analyst believes that the excess savings accumulated by residents who have actively reduced their consumption during the epidemic should be gradually released and support the rebound of consumption. However, whether the excess savings caused by the shrinkage of housing purchases can be effectively released depends on whether the real estate market can rebound next year.

As for the distribution of excess savings among different populations, it can be seen that the savings rate of urban residents in the past three years from 2020 to 2022 has been higher than that before the epidemic, while the savings rate of rural residents in 2021-2022 was lower than that before the epidemic. From both data and logical perspectives, it can be inferred that the excess savings accumulated by high-income groups during the epidemic are more than those of relatively low-income groups. Therefore, the consumption willingness reversal of high-income groups after the epidemic, and the elasticity and space of optional consumption they have, will also be higher than the rebound strength of low-income groups' consumption and rigid demand consumption.

Due to the lack of direct government subsidies and stimuli, and the obvious downward shift of the central income growth of residents during the pandemic, and although domestic residents have excessive savings, their consumption willingness is not high. Dolphin Analyst believes that the subsequent domestic consumption will mainly be in a recovery situation, like the United States, and the probability of higher prosperity after the epidemic than before the epidemic is not high.

"Fourth, the recovery of consumption is a double-edged sword for online retail." Although the overall large consumption sector will recover next year, the online retail and consumption market have actually been in a state of mutual growth and decline since the outbreak of the pandemic. Firstly, looking at the experience in the United States, since the U.S. relaxed epidemic control in March-April 2021, while the overall retail growth rate recovered quickly, the online retail growth rate declined rapidly. Starting from mid-2021, the online retail growth rate in the United States continued to be lower than the overall retail growth rate.

A similar pattern has also emerged in China. As can be seen clearly in the figure below, when the overall social retail growth rate in 2020 and 2022 was weak, the penetration rate of online retail in China increased significantly. But in 2021, when the overall social retail growth rate was obviously restored, the penetration rate of online retail in China decreased.

Therefore, "next year, as the overall consumption market recovers, although online retail may maintain or even exceed this year's growth, in relative terms, the relative advantages and disadvantages of online and offline consumption will probably be reversed. The first half of next year may be the last window of opportunity for online retail platforms to take the lead."

"Fifth, what investment strategy should be adopted for inter-sectoral investment in Internet retailing next year?" Based on the previous analysis of the post-epidemic consumption recovery overseas and the judgment of the subsequent repair path in China, Dolphin Analyst generally believes that next year, Internet companies focusing on service consumption will perform better, while those primarily focusing on online product consumption will exhibit relatively weaker performance. Among the online retail companies, the best one can do is "to choose from among the short". Companies focusing on optional consumption will have relatively better performance.

From the perspective of performance and stock price rebound strength, since next year's domestic consumption is more likely to recover rather than prosper, it is impossible to expect the performance and stock prices of Internet companies to rise comprehensively and significantly. The opportunity lies in grabbing stocks with outstanding performance advantages whose valuations have not been severely outpaced.

Specifically, the relative advantages of Internet companies in each of the three stages of the impact period of the epidemic, the initial stage of consumption recovery, and the later stage of consumption recovery are judged as follows:

"1) The first stage: the highest epidemic impact, e-commerce stocks with strong performance will most likely be Pinduoduo and Meituan."

As can be seen from the analysis in the third part of this article, from the end of November to the end of January 2023, all types of goods and service consumption in China have been damaged by the impact of the epidemic, and the magnitude is comparable to that during the static control period in Shanghai in the second quarter. Most pan-retail internet companies' Q4 performance is expected to hit rock bottom again, worsening QoQ from Q3, amid the impact of the pandemic. Under the impact of the epidemic, essential and must-have consumption will continue to dominate. Among Dolphin Analyst's covered companies, internet platforms such as Pinduoduo, JD, and Meituan, which have advantages in daily necessities and food categories, will remain relatively strong in grim surroundings.

Initial post-epidemic stage: optional rebound - Alibaba, Vipshop, and CDFG have higher performance elasticity.

From the perspective of foreign operations, the peak period of the epidemic usually lasts at least two months. Therefore, it is possible that from March and April 2023, optional consumption and travel service consumption will begin to significantly recover, and the rebound rate of optional consumer goods consumption should be faster.

During this stage, Alibaba, Vipshop, and CDFG, which have advantages in tax-free shopping, clothing, cosmetics, and other categories, may have a clear turning point in their performance.

The third stage is in the later stage of consumption recovery-super expected to mainly watch Ctrip, Didi, and Meituan.

At this time, the recovery of commodity consumption has been basically completed, and considering the backlash of e-commerce in the post-epidemic era, the opportunity for physical e-commerce to continue to generate significant excess returns in this stage (the second half of next year, the end of next year) will be significantly reduced.

The offline consumption and travel and entertainment sectors will enter a relatively dominant period. At this time, among pan-internet companies, Ctrip, Tongcheng, CDFG, Didi, and other companies' performance should be better.

However, Dolphin Analyst has yet to fully cover the companies in this sector. Although there is a strong performance reversal expectation for next year, whether the current valuation of these companies in this sector has already surged is another issue that Dolphin will analyze in depth later. At the same time, during this stage, Meituan's offline business will also benefit, but competition from TikTok cannot be ignored.

As for the real estate sector, which is also crucial for the recovery of the domestic economy, with recent financing support for real estate companies and the relaxation of various policies such as purchase restrictions and home loans on the demand side, the expected recovery of the real estate sector next year is gradually increasing. However, whether actual housing transactions can significantly rebound is also a major issue that needs to be studied. Dolphin will conduct a separate analysis of this sector and related companies such as Beike in the future.

Dolphin Research related studies in the past:

September 30, 2022, "Pinduoduo vs. Vipshop: Your 'poor day' is their 'good day'?"

September 22, 2022, "Alibaba, Meituan, JD, Pinduoduo: all resigned? Still fighting for the 'big game'."

April 27, 2022, "Alibaba vs. Pinduoduo: After the bloody battle, only coexistence?" 2022 April 22, "Why are Meituan and JD.com performing better in the stock market despite the fierce competition for existing resources?" (https://longbridgeapp.com/topics/2388210)

2022 April 13, "As we enter a low-growth period, how much value do Alibaba and Tencent have left?" (https://longbridgeapp.com/topics/2317128)

Risk disclosure and statement for this article: Dolphin Analyst Disclaimer and General Disclosure (https://support.longbridge.global/topics/misc/dolphin-disclaimer)

The momentum of offense and defense has been greatly reversed. "Alibaba, Ctrip, Didi" are going to counterattack.