China Consumer Sector – A strong comeback in 5-1 golden week

8May2023 CMBInternationalGlobalMarkets|EquityResearch|SectorUpdate ChinaConsumerDiscretionarySector WalterWoo (852)37618776 walterwoo@cmbi.com.hk YumChina(9987HK)shareprice (HK$) 550.0 500.0 450.0 400.0 350.0 300.0 250.0 200.0 May-22 StockHSI Aug-22Nov-22Feb-23 Source:Bloomberg,CMBIGMestimates XBXB(520HK)shareprice (HK$) StockHSI 11.0 9.0 7.0 5.0 3.0 1.0 May-22Aug-22Nov-22Feb-23 Source:Bloomberg,CMBIGMestimates Xtep(1368HK)shareprice (HK$) 16.0 StockHSI 14.0 12.0 10.0 8.0 6.0 May-22Aug-22Nov-22Feb-23 Source:Bloomberg,CMBIGMestimates Topsports(6110HK)shareprice (HK$) StockHSI 9.0 8.0 7.0 6.0 5.0 4.0 3.0 May-22Aug-22Nov-22Feb-23 Source:Bloomberg,CMBIGMestimates OUTPERFORM (Maintain) ChinaConsumerSector Astrongcomebackin5-1goldenweek ImpressiverecoveryvsFeb-Apr2023,whilebothconsumerandinvestorssentimentshouldbeboosted,thepostholidayspurchasingpowerisstillimportant.Wefindthedatapointsduringthis5-1goldenweekin2023slightlybetterthanexpectationandencouraging,esp.aftertheweakeningconsumptiontrendpostCNY2023. 1)Wearehighlydelightedtoseeasurgeinrecoveryrateofdomestictourismvolume/spendingduringthisholidayto119%/101%,whichisfarbetterthanthe83%/51%inQingmingFestivaland89%/73%inCNY,accordingtoMinistryofCultureandTourism/文化和旅游部. 2)Thespendingpoweralsocontinuedtoimprove,wherespendingpertouristsjumpedby32%in5-1goldenweek,muchfasterthanthe10%/6%duringQingmingfestival/CNY.Moreover,ticketsizeformovieactuallyincreasedby18%YoY,whilethatwasonlyflattishduringtheCNY2023. 3)Tier1citiesareclearlyoutperforming,whereretailsales(basedonvariousofficialsources)hadincreasedby21%/65%/33%inBeijing/Guangzhou/Shenzhen,comparedtothenation-widegrowthof19%,mostlikelyduetolowbase.Hence,companieswithgreatersalesmixintheseareasshouldbenefitmore. 4)Whiledomestictravellinghasroughlysurpassedtheprecovid-19level(270mnpassengerjourneysreached270mninthis5-1holidaysandreached101%ofthelevelin2019,muchbetterthan54%duringCNY2023,accordingtoMinistryoftransport/交通运输部),theoutboundtravelonlyrecoveredtoabout40%ofthe2019level(basedoninternationalairflightsvolume),whiletherecoveryrateofvisitorstoHK/Macauwerebetterat60%/70%(vs2018/2019level). Ononehand,webelievetheseconstructivefundamentals(retailsalesacceleratedfrom5.8%in1Q23to18.9%in5-1goldenweek,gradualrecoveryindomesticandinternationalinteractions)wouldleadtobetterincomeandcorporateearningsgrowth,aswellasconsumerandinvestorssentiment.Ontheotherhand,wewouldstillstayhighlycautiousaboutthepurchasingpowerpost5-1goldenweek,asthepurchasingpowercanstillbedraggedbypotentiallyweakpropertymarketandgeo-politicaltensions. Tourism(includinghotels),catering,sportswearcontinuedtooutperform,whileapparelandhomeappliancesslightlyunderperformed.AccordingtotheVATinvoicedatabyStateAdministrationofTaxation/国家税务总局增值税发票数据,theconsumptionrelatedsales,during5-1goldenweek,grewby24.4%YoY,whileserviceconsumptionoutpacedcommodityconsumption(at28.7%vs19.5%).Bysector,salesgrowthfortourismrelated/hotels/sportsservice/catering/in-doorentertainment/apparelwere320%/52%/34%/33%/24%/15%.Also,basedondatafromMinistryofCommerce/商务部,retailsalesincreasedby18.9%YoYduring5-1goldenweek,whilethatforkeycateringenterprises/jewelry/autos/communicationdevices/apparel/cosmetic/cigar&liquors/homeappliancewere58%/23%/21%/20%/18%/17%/15%/14%. Weprefersectorslikecatering/sportswear/tourismandhotels/apparel,morethanhomeappliances. Cateringsector(outperform).Withoutdoubts,cateringsalesgrowthisleadingmanyotherindustries.Also,theaverageSSSG(CMBIest.formajorlistedcateringbrands)isalsoaccelerating,fromjust6%/-2%inJan/Febtoaround24%inMarandnow38%in5-1holidays.Butthekey,inourview,istherecoveryratevs2019(CMBIest.),whichwasdecliningfrom95%+inJanto80%+/75%+inFeb/Mar2023,andithasfinallyimprovedto85%+in5-1goldenweek,whichishighlyencouraging.Onthemarginside,wedobelievethecostsinflationwouldnotreturnasfastasthesalesgrowth,henceoperatingleveragecanstillbemeaningfulinFY23E,evidencedbytheYUMC1Q23resultlately.IntermsofSSSGfordifferentbrands(CMBIest.),XBXBisleadingat132%,followedbyabout40%forHDL,30%forNayuki,26%forTaiEr,22%forCouCou,21%forJMJandabout15%+forKFCandPizzaHut.WebelievetheKFCandPizzaHut’sSSSGwaslowerjustbecauseoftheirdifferenceinSSSGdefinition,actualnumberscanbemuchstrongeriftheyareonthesamepage. WepreferYumChinamoregivenitsindustryleadingrecoveryratevs2019(atabout90%/100%forKFC/PizzaHut)andexcellentworkonmarginimprovements.WealsolikeXBXB,supportedbythestellarSSSGof132%forXBXBduring5-1goldenweek,whichshouldmorethancompensateslightmissforCouCou.Wealsoliketeadrinksastheindustrycanbenefithugelyfromthere-openingandconsumptiontradedown. Toppick:YumChina(9987HK,BUY)>XBXB(520HK,BUY)>Haidilao(6862HK,BUY)>Jiumaojiu(9922HK,BUY)=CDC(341HK,BUY). Sportswearsector(outperform).Accordingtovariousofficialdata,sportswearsalesgrowthshouldbeatleastinlinewithoverallconsumption(ifnotbetter)duringthe5-1goldenweek.Basedonourchannelchecks,theretailsalesgrowth(averageforleadinginternationalanddomesticbrands)shouldbeatabout25%+,betterthanourexpectationandfurtheracceleratedfromthe20%+inApr202