China Consumer Staples Sector Favor leaders for defensiveness

13 Feb, 2020 16:53
source: ABCI International

Author: 农银国际消费板块研究员 潘弘兴

  • Discrepancy between nominal and real income growth per capita is like to stay unchanged or widen
  • Inflation to face upward pressure due to the persisting inflation of pork prices
  • Coronavirus outbreak will drag down consumption growth in theshort term
  • Demographic changes pose challenges in the long term
  • Overweight sector; prefer industry leaders on robust defensiveness

Growing per capita income may not indicate higher purchasing power. We believe discrepancy between nominal and real growth per capita income for 2020 will likely stay unchanged or widen, mostly because of the persisting inflation amid a negative macro backdrop. Lower purchasing power would have negative impacts on consumer goods industry.

Coronavirus outbreak weakens consumption growth. The coronavirus outbreak will hamper growth in China’s consumer market. We believe the extended Spring Festival holiday and the quarantined measures in place would reduce retail sales growth starting in Feb. Loss of income due to the outbreak may further reduce the consumers’ ability and willingness to spend.

Demographic changes to pose long-term challenges. We believe effectiveness of the two-child policy has been fading, as indicated by the dwindling number of newborns in 2019 to 14.65mn. Slower population growth, which stood at 0.33% YoY in 2019, could weigh on consumption growth unless per capita consumption accelerates.

Sector recommendations. We recommend BUY on WH Group (288 HK), Mengniu (2319 HK), Anta(2020 HK), Yili (600887 CH), and Shuanghui (000895 CH). These industry leaders possess strong defensiveness amid a challenging economic environment. We expect these players to be able to raise product pricing and margins amid ongoing inflation. For WH Group (288 HK), the Phase I Sino-US trade deal would bring growth opportunities.

Risk factors: 1) Macroeconomic risk; 2) inflation risk; 3) Policy/regulatory uncertainty; 4) Risk relating to Sino-US trade dispute; 5) Event risks; 6) Demographic risk.