Is Consumption Really Just "Weak Recovery"?

The second set of social and retail data for 2023 was released as scheduled: From January to March, the total retail sales of consumer goods nationwide were CNY 11,492.2 billion, a YoY increase of 5.8%. In March alone, the total retail sales of consumer goods reached CNY 3,785.5 billion, a YoY increase of 10.6%. Retail sales excluding automobile sales reached CNY 3,359.1 billion, growing 10.5%.

Of note:

The overall recovery of domestic consumption is steadily improving despite the low base effect last year. From 2019 to now, the composite growth rate in March was 4.5%, which is steadily increasing compared to the 3.9% growth rate in January and February. Dolphin Jun's outlook report last year believed that we shouldn't expect a strong retaliatory rebound in overall consumption in 2023, but it's not as "weak" as expected.
The offline recovery continues to have a rebound effect on online channels, and the online retail sales of physical goods increased by about 10.9% YoY after the adjustment of the statistical bureau's caliber, which is completely consistent with the 10.6% growth rate of retail sales in the big picture. The online penetration rate in March also only increased by 0.2%. Therefore, this year's online channel is unlikely to run out of relative advantages.
The service industry, represented by eating and entertainment, is expected to have a strong rebound in consumption. Catering revenue soared by over 36% YoY in March, and non-physical retail online sales of tickets such as air tickets and attraction tickets increased by nearly 17%. Recent social news and data published by OTA platforms such as Meituan and Ctrip indicate that the demand for tourism is relatively strong in the near future, surpassing even the level of the same period in 2019. Although the market's expectations for related industries are relatively high, there is still a possibility of exceeding expectations.
In terms of category performance, clothing and jewelry retail sales increased by over 17% and 37% respectively in March, which basically confirms Dolphin Jun's expectation that optional consumption performance will be better in 2023. The ugly retail data for beauty products on the Taobao platform during the March 8th promotion period may be more of a problem for Alibaba itself. In fact, clothing and jewelry brand companies may also have good opportunities.
Although the absolute growth rate of home appliances and communication products is still low, the former's decline narrowed, and the latter's growth rate has turned positive YoY. At the same time, the new housing turnover in March also increased by 9% YoY. There is no need to be too pessimistic about the expected growth of electrical products throughout the year (including for JD.com). However, the unexpected risk point is the continuous decline (-27%) in the new construction area of housing in March, which still needs to pay attention to the sustainability of the real estate market's recovery.

Is consumption still heating up, and is online confirmed to be under backlash? After the momentum of domestic consumption's recovery in January and February this year, the recovery situation in March can be said to have reached a new level. The YoY growth rate of total retail sales in March soared to 10.6%, returning to double digits for the first time since July 2021. The overall recovery momentum is indeed good.

Although the low base effect caused by the epidemic in Shanghai and other places last year (-3.5%) was favorable, based on the compound annual growth rate based on 2019, the growth rate in March was 4.5%, which is higher than January and February's 3.9%. It can be seen that the domestic consumption is gradually improving.

However, the data in March once again verified the prediction made by "Dolphin Jun" before the New Year: In the case of the full-channel recovery of consumption in 2023, while the absolute growth rate of online retailing will also increase compared with 2022, its advantages relative to offline channels will disappear. According to the adjusted online physical retail sales growth rate of the National Bureau of Statistics, although it has also increased from 4% to nearly 11% in recent months, the overall growth rate of the social retail industry in this month has also recovered to 10.6%.

As the following figure shows, the slope of the social retail industry's recovery is higher, and its growth rate is fully consistent with that of the online channel.

From the perspective of online penetration rate, the situation in March is consistent with that of January and February, and the year-on-year increase in the penetration rate is only 0.2%. It is the lowest level since 2020 (except for the outlier in March 2021). Therefore, it is difficult to expect online channels to have a super large performance this year.

However, from the perspective of absolute growth rate, "Dolphin Jun" expected the full-year growth rate of online physical goods to be about 13% before the Spring Festival. Judging from the current trend, there is a high possibility of exceeding expectations. The actual growth rate in March has reached nearly 11%, and the base in the following months of 2022 will be lower. Therefore, the year-on-year growth rate of the online market in Q2 is likely to be considerable, which may bring investment opportunities and expectations disparity.

2. Offline consumption is booming, is it too early to be overcrowded?

On the other hand, under the extremely low base last year, the rebound of offline retail and catering was very remarkable. In March, catering revenue increased by 26% year-on-year, and the growth of offline commodity retailing rebounded to 6.1%.

In addition to catering, various service-related non-physical online consumptions, such as ticket services and transportation tickets, also recovered strongly, with a year-on-year increase of 17% in March (not adjusted).

In addition, the May Day travel order data recently released by Meituan and Ctrip is also quite strong, and the order volume has even significantly exceeded that of 2019. Looking at various data, the retaliatory rebound of service consumption represented by eating and playing is quite strong, and the second quarter performance of related companies may be very impressive, and there is also the possibility of exceeding expectations.

3. The long-awaited optional consumption recovery has arrived, but is the real estate market cooling down?

Looking at the commodity categories, the data for March finally verified Dolphin's previous expectations of a rebound in optional consumption. Among them, the rebound of clothing and gold, silver, and jewelry is the strongest, with year-on-year growth rates in March exceeding 17% and 37%, respectively. At the same time, cosmetics also grew by nearly 10%.

Therefore, the poor performance of Tmall platform during the March 8th promotion is probably due to Alibaba's own reasons, and the performance of companies related to clothing and jewelry can also be expected (in fact, the stock prices of related companies have already reflected this).

In addition, while the absolute growth of electronic products such as home appliances and communication equipment is still very low, the trend shows that the year-on-year decline in home appliances is narrowing, and the growth rate of communication products is also turning upwards. Therefore, there is no need to be too pessimistic about the sales growth prospects of electronic products this year, and this is also true for JD.com, which is in a valuation and performance dilemma.

However, in a landscape of overall recovery, there is also a risk worth noting. After the domestic real estate market showed signs of recovery in January and February this year, the sustainability of the recovery has been a concern of the market. Judging from the data for March, the transaction volume of new residential buildings is still maintaining a rising trend, and the year-on-year growth rate has increased from 4% in January and February to 9%.

However, the newly started area in March decreased by 27% year-on-year, which is a significant deterioration from -9% in January and February. Dolphin has not yet seen a reasonable explanation for why new construction suddenly declined while sales were good. But in any case, a decrease in new construction means a decrease in future supply of new houses, which is not good news for the future recovery of the real estate market and consumption. It is necessary to pay attention to whether the newly started area can sustainably improve in the future.

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