Summary of China Consumer Staples 3Q25 Preview Industry Overview - The Consumer Staples sector in China is experiencing weak consumption trends in 3Q25, with easing policy headwinds but ongoing constraints on on-trade recovery [1][2] - Companies are prioritizing channel health and maintaining rational marketing investments due to weak demand, leading to volume weakness across sub-sectors [1][2] Key Insights - **Sales Growth Expectations**: An aggregated topline growth of +3%/+4% is anticipated for the Staples coverage (excluding Spirits), with beverages, pet foods, and snacks leading sales growth at 10-30% [2] - **Comparison to Previous Quarters**: This growth represents a deceleration from +5%/+7% in 2Q25, reflecting broader consumption weakness [2] - **Spirits Sector Outlook**: The spirits sector is expected to see a decline of -7%/-10% in sales/net profit, likely marking 3Q as the trough level due to stringent shipment controls [2] Company Performance - **Leaders Outperforming**: Companies like Eastroc, Nongfu, Haitian, CR Beer, Yankershop, and Weilong are expected to deliver resilient sales growth in 2H25 with higher margin visibility [2] - **Downgrade of Jonjee**: Jonjee has been downgraded to Sell from Neutral due to an 8-10% downward revision in earnings amid competitive pressure from Haitian [2] Market Trends - **September Sales Trends**: Beer and dairy sales trends improved sequentially ahead of Golden Week, while beverage and snacks showed wide divergence [2] - **Focus on Channel Health**: Companies are expected to focus on channel health and shipment control in preparation for a fresh start in 2026 [2] Future Outlook - **Investment Strategy for 2026**: Companies are expected to face diminishing cost benefits, necessitating a focus on competition and promotion strategies [8] - **Growth Drivers**: Selective snacks and beverage players are anticipated to drive topline growth through core SKU focus and POS expansion [8] - **Potential Recovery in Challenged Sectors**: Spirits valuations suggest a potential bottoming out, with recovery tied to gradual policy normalization expected in 2Q26 [8] Valuation and Shareholder Returns - **Valuation Outlook**: Investors are beginning to look into 2026/27E earnings, with pet food trading at an average of 28x/21x P/E compared to 38x for 2025 [8] - **Shareholder Return Support**: Companies like Tingyi and WH Group are noted for their attractive yields of 7-8% for 2025E/2026E [1] Conclusion - The Consumer Staples sector in China is navigating a challenging environment with weak demand and competitive pressures, but certain leaders are positioned to outperform. The focus on channel health and strategic investments will be crucial as the sector prepares for 2026.

Summary of Conference Call on China Consumer Staples Industry Overview - The consumer staples sector in China is experiencing weak demand trends from Q2 to Q3, influenced by policy and weather factors, leading to a wider divergence between market leaders and laggards [1][2] - The spirits sector has seen a valuation increase of 24% in Q3 to date, compared to a 16% increase in the A-share Liquor index and a 13% increase in the MSCI China Index, driven by improved market sentiment and expectations of stimulus policies [1] Key Insights Demand Trends - Overall demand remains weak, particularly in gifting categories as noted by dairy and spirits companies [1] - Beer, spirits, and liquid milk are under pressure, while beverages, snacks, and pet foods show mixed performance with some companies experiencing growth due to strong product cycles and omnichannel strategies [2] Pricing and Market Dynamics - Pricing remains muted across the sector, with spirits and beer companies focusing on sub-premium segments [2] - The August Foods Consumer Price Index (CPI) decreased by 4.3% year-over-year, indicating potential challenges in pricing strategies [1] Company Performance and Strategies - Companies like Haitian and Nongfu are gaining market share, while others like Jonjee are struggling [9] - CR Beer reported growth in premium and sub-premium volumes, while maintaining a disciplined approach to pricing and promotions [47] - The spirits sector is seeing a shift towards mid-end and mass-market products to counteract upper-mid-end softness [43] Future Outlook - The sector is expected to see a gradual recovery in retail demand, particularly in traditional categories like beer and dairy, with potential for value stock rotation in early 2026 [8] - Companies are expected to enhance shareholder returns and maintain dividend payouts, with a focus on operational efficiency and cost management [8] Sector Preferences - Preference remains for beverages due to secular growth, followed by pet foods and dairy, with a positive outlook for beer in the medium term [13] - Stock recommendations include Eastroc, Gambol, and China Pet Foods for strong product cycles, and CR Beer and Tsingtao for their dividend yields and valuations [13] Additional Observations - The competitive landscape is evolving, with top players consolidating market share amid weak demand, leading to a valuation premium for leading brands [9] - The pet food sector is benefiting from a shift towards higher-value segments, with companies focusing on premiumization and operational efficiencies [48] - Snacks are seeing a channel shift towards discounters and mom-pop stores, with a focus on large SKU strategies and product mix upgrades [49] Key Watch Factors - Policy directions post the Fourth Plenum and local catering incentives are critical to monitor, especially their impact on banquet traffic [11] - The performance of mid-end and mass SKUs in spirits and the overall margin discipline across the sector will be crucial as cost pressures moderate [12]

Investment Rating - The report maintains a bullish outlook on stocks related to Reliability of Power/Water/Energy, Efficiency of Energy/Resources/Land, and solutions for Aging Populations/labor strains [1][15][38] Core Insights - Sustainable funds with broader APAC regional mandates have outperformed non-ESG peers for six consecutive quarters, while those with individual country mandates have struggled [1][35] - Performance is deemed more critical than policy for the growth of Sustainable Investing's AUM penetration, with a focus on quality and governance [1][13] - The report highlights a notable increase in AUM penetration for ANZ-focused Sustainable funds, reaching 4.8% by 1Q25, up 23 basis points year-over-year [12] APAC Fund Performance and Flows - APAC-focused Sustainable equity AUM remained flat at US$212 billion, with minor outflows of -US$0.9 billion in 1Q25, primarily from Japan and Emerging Markets-focused funds [9][19] - Passive Sustainable strategies now represent 52% of total APAC-focused Sustainable AUM, attracting US$1.0 billion of inflows in 1Q25 [9][19] - Sustainable funds in the top two quintiles based on 3-year risk-adjusted returns saw cumulative inflows of +US$6.0 billion in 2024, contrasting with -US$16 billion outflows in the bottom cohort [10][12] Stock Ideas - New entrants into the E&S Leaders screen include companies like JYP Entertainment, Kweichow Moutai, and Tata Consultancy, all rated as Buy by Goldman Sachs [6][7] - Thematic stock in focus includes Harmonic Drive Systems, which aligns with Green Capex and Aging Populations Solutions themes [6] Sustainable Fund Trends - The report notes that the median performance of APAC-focused Sustainable funds was at the 45th percentile in 1Q25, indicating underperformance relative to peers [35][42] - Greater China-focused Sustainable funds have shown significant impact on median performance, comprising approximately 50% of the funds tracked [36][44] - The report emphasizes a less-is-more approach to Sustainable integration strategies, focusing on measurable metrics [38]

Investment Rating - The report does not explicitly state an investment rating for the spirits industry or specific companies within it Core Insights - The spirits industry is currently experiencing a transition period, with companies focusing on stability, channel profits, and product quality rather than aggressive growth targets [3] - There is a noted weak trend in consumption around the Dragon Boat Festival, with only Moutai showing a slight increase in prepayment compared to the previous year [1][6] - Companies are increasingly targeting younger consumers and expanding their brand rejuvenation efforts to capture this demographic [3] Summary by Company Moutai - Moutai has introduced new promotional policies for residential and wedding banquets to stimulate demand, including cash rebates and complimentary honeymoon trips for larger events [13] - The wholesale price of original case Feitian Moutai decreased from Rmb2,165 to Rmb2,125, while unpacked Feitian Moutai's price fell from Rmb2,080 to Rmb2,060 [2][22] Wuliangye - Wuliangye's wholesale price remained stable at Rmb950, with prepayment rates in the first quarter of 2025 reported at 40%-50% [6][22] Guojiao 1573 - Guojiao 1573's wholesale price decreased from Rmb860 to Rmb855, with prepayment rates around 40%-45% [6][22] Yanghe - Yanghe reported a prepayment rate of approximately 45% and is focusing on expanding its sales network [6][8] Gujing - Gujing aims for nationwide expansion and a focus on sub-premium strategies, with a sales network covering over 70% of regions nationwide [7][8] Yingjia - Yingjia targets total sales of Rmb7.6 billion for 2025, reflecting a 3.5% year-on-year increase, and plans to improve dividend payout ratios [11][13] Market Trends - The retail sales of liquor and tobacco in China grew by 5.1% year-on-year in April 2025, indicating a gradual recovery in the market [13] - Spirits companies are focusing on improving retail sell-through, inventory destocking, and channel expansion amid industry-wide growth deceleration [13]

Investment Rating - The report maintains a consistent sector preference, favoring sports brands, diversified retailers, dairy, beverages, and restaurants, while being less favorable towards apparel/footwear OEM, furniture, projectors, discretionary small kitchen appliances, jewelry, and non-super-premium spirits [11]. Core Insights - Consumption in China has shown signs of recovery, with retail sales growth improving to +4.6% year-over-year in 1Q25, and companies in the coverage reporting an average growth of 14% compared to 12% in 4Q24 [1]. - Despite the positive growth, companies remain cautious about the outlook due to ongoing volatility and external factors such as US-China tariff developments impacting consumer confidence [2][1]. - Margin performance in 1Q25 was mixed, with some companies benefiting from favorable raw material prices and cost control, while others faced risks from marketing investments and competition [1]. - Companies are generally maintaining disciplined pricing strategies and healthier inventory levels, although some categories like spirits and sportswear are experiencing challenges due to demand pressures [1]. - The impact of tariffs on earnings and consumer sentiment is significant, with companies cautious about the second half of 2025 amid uncertainties [2]. Summary by Sections Key Findings from 1Q25 Results - Retail sales growth improved to +4.6% year-over-year, with coverage companies reporting an average growth of 14% [1]. - Labor Day consumption growth accelerated, indicating a potential rebound in consumer spending [1]. Expectations for 2Q25 - Companies are cautious about the outlook for 2H25 due to tariff uncertainties, although those with market share gain opportunities may be more resilient [2]. Sector/Stock Preferences - Preferred sectors include sports brands, diversified retailers, dairy, beverages, and restaurants, while least preferred sectors include apparel/footwear OEM and furniture [11]. Macro Data Points - The report notes that macroeconomic data points are solid, but ongoing tariff developments and policy support need to be monitored [11]. Valuation Methodology - The report emphasizes the importance of understanding the valuation methodology and the potential risks associated with it [11].

Investment Rating - The report maintains a "Buy" rating for Kweichow Moutai, Wuliangye Yibin, Luzhou Laojiao, and Fen Wine, while issuing "Neutral" ratings for Anhui Gujing and Jiangsu King's Luck Brewery, and "Sell" ratings for Jiangsu Yanghe, Sichuan Swellfun, and Jiugui Liquor [7][8]. Core Insights - The spirits industry is experiencing a slowdown in growth, with average sales and net profit growth projected at 6% and 8% respectively for 2025, following a tough 4Q24 [1][6]. - Super premium brands like Moutai and Wuliangye continue to show resilience, achieving higher growth compared to mid- to low-end segments [2][16]. - Companies are adopting more cautious financial guidance for 2025, indicating a focus on channel health and inventory management [5][18]. Summary by Sections Sales and Profit Performance - Spirits coverage saw a slowdown with average sales growth of 7% and net profit growth of 8% in 2024, with a tough 4Q24 showing only 3% sales growth [1][11]. - Moutai and Wuliangye reported strong sales growth of 16% and 7% respectively in 2024, while Jiangsu Yanghe faced a significant decline of 13% [13][16]. Company Guidance - Most companies have set lower financial guidance for 2025, reflecting caution regarding demand outlook and a focus on resolving channel inventory issues [5][18]. - Kweichow Moutai's guidance for 2025 includes a sales growth target of 9%, down from 15% in 2024 [18]. Market Trends - The report highlights a divergence in performance between super premium and upper mid-end players, with super premium brands maintaining stable demand while upper mid-end brands like Yanghe and Jiugui faced significant declines [16][22]. - The demand for upper mid-end spirits is declining, while super premium segments remain stable, indicating a shift in consumer preferences [20][22]. Shareholder Returns - There is a notable increase in dividend payout ratios across the sector, with some companies committing to high payout ratios and total cash dividends [17][28]. - Wuliangye and Laojiao have raised their dividend payout ratios to approximately 70% and 65% respectively, reflecting a commitment to shareholder returns [17]. Valuation and Earnings Revisions - The average P/E ratio for spirits coverage is currently at 16x for 2025, slightly above historical averages, with a general downward revision in earnings forecasts for several companies due to competitive pressures [1][6][28]. - Wuliangye's earnings forecast has been revised upwards, while forecasts for Gujing, King's Luck, Yanghe, and Swellfun have been revised downwards [6][28].