Summary of China Consumer Pulse Check: 3Q25 Industry Overview - The report focuses on the **China Consumer** sector, highlighting softer consumption trends in **3Q25** across various industries including spirits, sportswear, cosmetics, and dairy [2][12]. Key Findings - **Overall Demand**: Consumption trends have softened, with earnings misses and growth deceleration noted in multiple sectors. Home appliances, despite benefiting from trade-in policies, also experienced a deceleration due to tougher comparisons and subsidy controls [2][12]. - **Peak Season Performance**: Goods consumption during peak seasons, such as the National Day holiday and Double 11, was weaker than expected, indicating a broader trend of demand softness [2][12]. - **Price Pressure**: The softness in demand has continued to pressure prices in categories like sportswear, spirits, and dairy. However, some players in prepared food and air conditioning are becoming more disciplined in their promotions due to limited economic value [2][12]. - **Bright Spots**: Some multinational corporations, particularly in the premium segments like luxury goods and cosmetics, reported signs of improvement in trends, attributed to wealth effects, foreign exchange impacts, easier comparisons, and improved operations [2][12]. - **Cautious Outlook**: Despite some positive signs, the overall outlook remains cautious due to broad-based softness observed in 3Q results and deteriorating macro data related to consumption [2][12]. Sector Preferences - **Preferred Sectors**: The most preferred sectors identified are diversified retailers, beverages, and pet food. The apparel and footwear OEM sector preference has been lifted to Neutral from least preferred due to easing tariff uncertainties [3][12]. - **Least Preferred Sectors**: The least preferred sectors include sports retailers, furniture, projectors, discretionary small kitchen appliances, and non-super-premium spirits [3][12]. Investment Focus - The report emphasizes focusing on companies with idiosyncratic growth opportunities, particularly in the new consumption space, despite softening sentiment due to brand cycles and base concerns. Companies with high shareholder returns and market share efficiency are viewed as more defensive in the current consumption backdrop [2][12]. Additional Insights - **Earnings Visibility**: Companies with relatively high earnings visibility into the next year, such as those driven by store and category expansion in freshly made drinks, are highlighted as potential investment opportunities [2][12]. - **Market Dynamics**: The report notes that while some sectors are facing challenges, there are still opportunities for growth in niche and premium brands, which are expected to outperform the broader industry despite a likely slowdown compared to the first half of the year [12][14]. Conclusion - The overall sentiment in the China consumer market for 3Q25 indicates a cautious approach due to softer demand trends, with specific sectors showing resilience and potential for growth. Investors are advised to focus on companies with strong fundamentals and growth visibility while remaining aware of the broader economic challenges.

Key Takeaways from the Conference Call Industry Overview - The focus is on the **China/Hong Kong Consumer** sector within the **Asia Pacific** region [4][7]. Core Insights - Recent marketing trips were conducted in the **US, Europe, and Singapore**, engaging with over **70 accounts**. There is a noted light holding in the China consumer sector, but interest levels are improving [7]. - Investors are concerned about the **macro question** regarding the **consumption recovery trajectory** and the impact of policies. Stock-level interest is concentrated on a small group of companies, with varying focuses by region [7]. - **US investors** are particularly interested in **idiosyncratic opportunities**, such as **Pop Mart**, while **EU and Singapore investors** show broader interest across sub-categories [7]. - Most investors believe that the overall **fundamental recovery** will take time, and they recognize that **fund flow rotation** is a significant factor, with risks associated with laggard catch-up [7]. - Emerging investment angles include: 1. Brands with **pricing power** that can maintain a premium position in a trade-down environment. 2. Companies that will benefit when the **wealth effect** shifts [7]. Consumption Drivers - Potential supportive policies and benefiting categories are highlighted, with expectations of likely **subsidies in 2026** and a potential positive wealth effect driven by a **stock market rally** [7]. Company-Specific Insights - **Pop Mart** is a focal point of debate; while the market is captivated by social media trends, it is essential to consider its growth in **recurring customers** and its strong **IP/product offerings**. The supply/demand dynamics are also a current topic of interest [7]. - **Sportswear** demand trends are being analyzed, with stock picking among companies like **ANTA**, **Amer**, and **Li Ning** [7]. - **Laopu** is discussed in terms of its value proposition, long-term growth drivers, and competition with European luxury and domestic jewelry brands [7]. - The impact of tariffs on **OEM** players is examined, particularly those better positioned between suppliers for footwear and apparel, with **Shenzhou** noted for its sales drivers [7]. - **Giant Biogene** is recognized for its barriers to entry, demand longevity, and margin trends [7]. - **YUMC** is analyzed for the impact of delivery subsidies [7]. - Potential recovery is anticipated in the **beer and dairy** sectors, along with opportunities in **home appliances** driven by state subsidies [7]. Additional Considerations - The report emphasizes the importance of understanding the **supply/demand dynamics** and the competitive landscape within the consumer sector, particularly in light of changing consumer behaviors and economic conditions [7].

Market Overview - A-shares experienced a significant rally on August 18, with the Shanghai Composite Index breaking through 3731.69 points, marking a nearly 10-year high [1] - By midday, the Shanghai Composite Index rose by 1.18%, the Shenzhen Component Index increased by 2.25%, and the ChiNext Index surged by 3.63% [1][3] - The total market capitalization of A-shares exceeded 100 trillion yuan for the first time in history, reaching a new milestone [2] Trading Activity - The trading volume in the Shanghai and Shenzhen markets reached 1.72 trillion yuan, an increase of 411.4 billion yuan compared to the previous trading day [2] - Nearly 4500 stocks in the market saw gains, indicating a broad-based rally [3] Sector Performance - Key sectors driving the market included AI hardware and large financial institutions, with strong performances from brokerage and fintech stocks [3] - Specific stocks such as Zhinan Compass and Strong Ray Technology hit their daily price limits, reflecting robust investor interest in AI hardware [3] - The film and entertainment sector also showed active performance, with companies like Huace Film & TV reaching their daily limits [3] Investment Insights - Tianfeng Securities noted that after the market reached new highs, there was an accelerated entry of previously sidelined funds, emphasizing a cautious yet optimistic approach [3] - Investment themes identified include: 1. Technology AI driven by Deepseek breakthroughs and open-source leadership 2. Valuation recovery in consumer stocks and gradual recovery in consumer segmentation 3. Continued rise of undervalued dividend stocks, with the potential for strong industry trends to influence their performance [3] - The core factor for consumer sector investment is valuation, with a current backdrop of low valuations, declining interest rates, and policy catalysts suggesting a recovery cycle [3]

Investment Rating - The report indicates a positive outlook for the retail and consumer sector, suggesting that consumption has bottomed out and is expected to continue growing, particularly during holiday periods [1][10]. Core Insights - Retail sales growth during the Labor Day holiday was better than expected, with key retail and restaurant enterprises reporting a year-over-year growth of 6.3%, up from 4.1% during the Chinese New Year holiday [1][10]. - Tourism sales also showed strong performance, with an 8% year-over-year increase, reaching 136% of pre-COVID levels, supported by a 6.4% increase in tourism traffic [1][10]. - Spending patterns indicate a rational approach from consumers, with per capita tourism spending growing by only 1.5% year-over-year, still below pre-COVID levels [3][10]. Summary by Category Retail and Catering - Home appliances, auto, and telecom equipment saw significant sales growth, with key enterprises reporting increases of 15.5%, 13.7%, and 10.5% respectively [2][23]. - Catering services also performed well, with an 8.7% increase in sales, particularly benefiting from strong traffic and consumer willingness to pay for experiences [2][22]. Tourism - Domestic tourism sales grew by 8% year-over-year, with total tourism sales recovering to 123% of pre-COVID levels, driven by increased traffic [10][11]. - Outbound travel showed solid momentum, with a 21% year-over-year increase, particularly to Hong Kong and Macau [11][10]. Regional Performance - Consumer spending growth was balanced across different tiers of cities, with key tourism cities and lower-tier cities benefiting from increased traffic [9][26]. - Major cities like Shanghai and Beijing outpaced the national average in consumption growth, aided by domestic tourism and visa-free policies [28][26]. Specific Categories - Jewelry sales improved due to better sentiment around gold prices, with notable growth from brands like Chow Tai Fook [24][19]. - The box office experienced a significant decline of 51% year-over-year, attributed to a lack of blockbuster films [25][10].

Investment Rating - The report upgrades diversified retailers, dairy, and restaurants from neutral to a more favorable rating, while maintaining a cautious stance on apparel/footwear OEMs, furniture, projectors, discretionary small kitchen appliances, jewelry, and non-super-premium spirits [10]. Core Insights - Signs of bottoming out in the consumer sector were observed in 4Q24, with reported sales growth averaging 14% compared to 7% in 3Q24, aided by an easier base and better-than-expected post-Chinese New Year consumption [1][14]. - The outlook for 2025 is generally prudent, with expectations for gradual recovery supported by government initiatives to boost consumption, although growth is anticipated to be back-end loaded for most categories [2]. - Online retail sales have consistently outperformed total retail sales, indicating a shift in consumer purchasing behavior [20][21]. Summary by Sections Key Findings from 4Q Results - Retail sales growth improved to 4% year-on-year in January-February, up from 3.0% and 3.7% in November and December respectively, with online channels continuing to outperform [14][17]. - Margin trends were mixed; some companies reported better-than-expected margins due to favorable commodity prices and cost control, while others faced margin pressure from increased marketing and business expansion investments [15]. Expectations for 1H25 - Companies are generally optimistic about long-term growth, with some planning to increase investments despite a cautious short-term outlook [2]. - The impact of US tariffs remains a significant concern, particularly for companies with substantial exposure to the US market [2]. Sector and Stock Preferences - Preferred sectors include sports brands and diversified retailers, with specific stock recommendations such as Anta, Moutai, and Midea highlighted for their potential [11]. - The report emphasizes the importance of monitoring policy execution and tariff impacts on consumption and company performance [2][10].