China Merchants Securities: Structured Food Growth, Liquor Lays the Bottom to Remove Burdens

The Zhitong Finance App learned that China Merchants Securities released a research report saying that the fundamentals of the food and beverage sector are still in the bottom-building stage. The performance of the segmented industry is divided. Liquor Q2 off-season is still in the low base, sales are still declining, and most wine companies are still in the adjustment stage. There is a steady transition in the off-season on the food side, and the growth rate of food supply chain-related sectors such as condiments and quick-frozen has slowed but there is still no shortage of bright spots; leading dairy products businesses continue to recover, and upstream storage prices can be expected to reverse; beer and beverage prices have been repaired but sales decelerated in June due to weather factors; snacks continue to expand in mass sales channels, and the fresh snack industry is becoming a new outlet; health product traffic is being affected by strict regulation, but leading companies will continue to benefit in the medium to long term.

The main views of China Merchants Securities are as follows:

Liquor sector: The phased decline in demand puts pressure on Q2 reports. Focus on the pace of corporate adjustments

The off-season in the second quarter was low, and sales were still declining. The government and business scene recovered slowly. The overall industry showed K-type differentiation. The price performance of Maotai and Volkswagen was relatively resilient, and sales at 1,000 yuan and sub-high-end prices were under pressure. Inventory and channel adjustments are still being removed at the enterprise level. The overall report is expected to continue to decline, but the magnitude is less than in the past two quarters. Focus on the marginal improvement in the third quarter report.

Overall demand in Q2 is relatively lackluster, focusing on volume and price restoration and structural growth opportunities in traditional sectors

In Q2, the performance of various subsectors of popular products was divided. In a horizontal comparison, although snacks, condiments, and beverages declined month-on-month, they were also superior. Among them, the complex was better than the tone. Dairy products performed steadily during the off-season. The leading room temperature business continued to recover, but tax policies affected profits, and a reversal in milk prices could be expected; beer and beverages entered the peak season, and volume and prices recovered, but sales slowed in June due to weather factors. The mass distribution channel for snacks continues to expand. Online traffic of health products has slowed down due to strict regulations, but leading companies will continue to benefit in the medium to long term.

Investment advice: structured food growth, liquor builds a foundation to remove burdens

Currently, sector valuations have declined quite sufficiently, and the market implied more pessimistic expectations. Looking at the actual situation, Q2 off-season liquor is still bottoming out, but the decline in the industry is expected to improve month-on-month. Some price segments that were adjusted earlier have taken the lead in getting out of the adjustment. Popular product segments such as snacks, condiments, and beverages are still growing by double digits. The dividend rate of many leading companies in the food and beverage industry has reached 4-5%, which is quite attractive compared to other industries. The bank believes that sector stock prices may have bottomed out before fundamentals, demand will gradually improve in the second half of the year, and the bottom should not be pessimistic. Target: 1) Main line 1: volume and price correction in anticipation of CPI improvement, recommending Youran Animal Husbandry, Yili Shares, Haitian Flavors (A+H), and Yihai International; 2) Main line 2: valuations return to a reasonable range of growth categories, promoting Nongfu Spring first, recommending Bairun Co., Ltd., Yanjing Beer, Dongpeng Drink, Seam Food, and Youyou Food; 3) Main line 3: Dividend support, left-side layout requirements are fixed. Liquor recommends Guizhou Maotai, Yingjiao Liquor, Shanxi Fenjiao, and Hong Kong Fen Liquor, pay attention to Weilong's deliciousness.

Risk warning: demand recovery falls short of expectations, increased industry competition, rising costs, product innovation, channel expansion falling short of expectations, etc.