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 Key Points from the Conference Call Industry Overview - The report focuses on the China Consumer Staples sector, specifically analyzing cost trends in various sub-sectors including beer, condiments, dairy, beverages, prepared food, and pet food [1][2][3]. Core Insights and Arguments - **Cost Trends**: Most staples players are expected to experience cost tailwinds in 2025, albeit at smaller magnitudes compared to 2024. Key raw materials such as SPI, bean pulp, vegetables, and pork have seen price reductions ranging from 3% to 27% year-over-year [2][3]. - **Raw Material Costs**: - Barley prices decreased by 0.8% month-over-month (MoM) and are down 4% year-over-year (YoY). Most players have locked in barley prices with benefits ranging from mid-single digits to high-single digits percentage [3]. - Molasses prices fell by 8% MoM, indicating a 14% YoY decline, which is beneficial for yeast producers [4]. - Soybean prices increased slightly by 0.7% MoM, while bean pulp prices declined by 1.8% MoM [3]. - **Sector-Specific Cost Index Changes**: - The Frozen Bakery cost index decreased by 1.6% MoM, while the Beverage cost index fell by 1.1% MoM due to lower costs of milk powder, sugar, and cocoa [4]. - The Compound Condiments cost index increased by 0.7% MoM, primarily due to higher soybean prices [5]. - The Prepared Meal cost index rose by 0.4% MoM, driven by higher prices for beef, shrimp, and raw milk [8]. Additional Important Insights - **Cost Impact Analysis for 2025**: - The theoretical cost impact analysis ranks pet food, soy sauce, and food & beverages as having the most significant cost benefits on average. The expected gross profit margin (GPM) expansion is highest for soy sauce, followed by beer and frozen food [43]. - **Raw Milk Pricing**: Domestic raw milk prices have stabilized at approximately Rmb3.02/kg, offering a significant price advantage over imported dry powder prices, which is a reversal from previous trends [33][34]. - **Imported Milk Products**: The volume of imported milk powder grew by 13% YoY, while imported dry milk products increased by 3% YoY [37][41]. Conclusion - The China Consumer Staples sector is experiencing a mixed landscape of cost pressures and benefits, with significant variations across different sub-sectors. The analysis indicates potential opportunities for cost savings and margin improvements, particularly in pet food and soy sauce, while also highlighting the challenges posed by rising prices in certain categories like compound condiments and prepared meals [2][43].

Cyber Security Incident - Asahi 首次披露网络攻击者使用勒索软件使其国内啤酒厂停产 [1]

Industry Trend - Entertainment industry sees Steven Knight, creator of "Peaky Blinders", launching "House of Guinness", a series set in 19th-century Ireland focusing on the Guinness beer brand [1] Company Focus - The series will depict scheming and scandal surrounding the legendary Guinness beer brand [1]

Core Insights - A new partnership between Netflix and AB InBev aims to enhance social experiences at home, reflecting changing drinking habits and socialization patterns [1][10] - The collaboration will include promotions for Netflix subscriptions, themed packaging, and product placements within Netflix shows [4][5] Group 1: Partnership Details - AB InBev's Chief Marketing Officer, Marcel Marcondes, emphasizes the importance of adapting strategies to appeal to home audiences, indicating a shift in social drinking occasions [1][2] - The partnership will see Netflix incorporate AB InBev products into its content, such as featuring Stella Artois in the upcoming season of "The Gentlemen" [5][12] - Both companies aim to create unique and engaging marketing campaigns that resonate with viewers and enhance the cultural relevance of their brands [7][10] Group 2: Market Context - AB InBev controls approximately 25% of the global beer market and is known for brands like Corona and Budweiser [7] - Netflix reportedly has over 300 million paid subscribers, providing a substantial audience for the partnership [8] - The collaboration is positioned to capitalize on the growing trend of social streaming, where viewers gather to watch shows together, even from different locations [2][10]

Core Insights - AB InBev and Netflix have announced a global partnership that connects iconic beer brands with Netflix titles and live events, marking an unprecedented collaboration in terms of global reach and scale of activations [1][2] Group 1: Partnership Details - The partnership aims to create enjoyable experiences for fans of legal drinking age by connecting them through shared passions such as sports, food, music, and comedy [2] - AB InBev will collaborate with Netflix on co-marketing campaigns featuring popular global and regional titles, including "The Gentlemen," "Brasil 70 - A Saga do Tri," and "Culinary Class Wars" [3] - The collaboration will include consumer activations, title integrations, limited-edition packaging, and digital promotions [3] Group 2: Live Events and Sponsorships - AB InBev and Netflix will also partner on co-branded campaigns around Netflix live events, including AB InBev's sponsorship of the Canelo vs. Crawford matchup in Mexico and advertising during Netflix's 2025 live NFL Christmas Game Day [4] - The partnership will extend to major global events, such as the 2027 Women's World Cup [4] Group 3: Company Background - AB InBev is a publicly traded company based in Leuven, Belgium, with a diverse portfolio of over 500 beer brands, including global brands like Budweiser, Corona, and Stella Artois [6] - For 2024, AB InBev reported revenue of 59.8 billion USD, showcasing its strong market presence and financial performance [6]

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]

Industry Focus Shift - Tilray, once a prominent cannabis company, is now heavily invested in the beer industry [1] Business Strategy - The company's strategic shift involves expanding beyond cannabis into the alcoholic beverage market [1]

Group 1 - The U.S. beer industry is experiencing significant changes, with updated fiscal '26 guidance indicating a lowered outlook for both top and bottom lines due to ongoing consumer demand headwinds, particularly affecting Hispanic consumers [1][2] - There is considerable concern at the consumer level, characterized by volatility and worries about financial stability, which impacts purchasing behavior [2] - The decline in "4,000 calorie jobs," such as construction, is noted as a negative trend year-on-year, which typically has a positive correlation with consumer spending [3]

Financial Data and Key Metrics Changes - The company has lowered its fiscal 2026 guidance, expecting enterprise top line growth to decline by 4% to 6% and beer business to decline by 2% to 4% [7][10] - Operating income expectations have also been adjusted, with enterprise expected to decline by 9% to 11% and beer business by 7% to 9% [8][10] - Comparable EPS is now projected to be in the range of $1.130 to $1.160 [10] Business Line Data and Key Metrics Changes - The beer volume decline is impacting overhead absorption and operational efficiencies, contributing to a 100 basis point headwind to overall margin for the beer business [8][10] - The company has gained share in 49 of the 50 states, with distribution gains up in the mid-single digits [3][4] Market Data and Key Metrics Changes - The Hispanic consumer segment is facing significant socioeconomic concerns, with 80% worried about socioeconomic factors and 75% about personal finances, leading to reduced shopping occasions [3][25] - The overall beer category is experiencing a decline, with scanner data down 4.5% year to date [12] Company Strategy and Development Direction - The company is focusing on controlling the controllables, such as execution and distribution, while continuing to invest in the category [18] - Innovation is seen as a core competency, with products like Corona Sunbrew performing well and attracting new consumers [26][32] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the challenging consumer environment and the volatility in the marketplace, particularly affecting Hispanic consumers [2][6] - There is a belief that as the socioeconomic environment normalizes, the beer category will also return to more typical growth patterns [13][16] Other Important Information - The company has returned approximately $600 million to shareholders through share repurchases in the first half of the fiscal year [10] - The impact of new tariffs is expected to be around $70 million for the beer business and $20 million for the wine business, totaling $90 million across the enterprise for the full fiscal year [10] Q&A Session Summary Question: How confident is the company in the medium-term growth outlook for the beer category? - Management believes that the beer category will eventually return to a normalized growth profile, supported by increased loyalty among Hispanic consumers and Gen Z [12][13] Question: What has changed from previous guidance to the current outlook? - The company has seen declining buy rates in key states, particularly those with a high Hispanic population, leading to a more cautious outlook [15][16] Question: How is the company addressing brand equity while competing on price? - The company is strategically adjusting prices for brands like Oro and Premier to remain competitive while maintaining strong brand health and equity [38][44] Question: What is the company's approach to innovation in the beer segment? - Innovation is critical, with successful products like Corona Sunbrew and non-alcoholic options driving interest and new consumer engagement [26][32] Question: How is the wine business performing amid industry challenges? - The wine business has shown positive performance, with brands like Ruffino and Kim Crawford outperforming the category [54][55]