CONSUMER INDUSTRY AUG 2023 RETAIL SALES DATA REVIEW：CONSUMPTION CONTINUES TO RECOVER

　　In Aug 2023, China's total retail sales of consumer goods increased by 4.6% YoY, higher than market expectations of a 3.0% YoY increase. The two-year average growth rate rebounded by 2.4ppts MoM, with a sequential recovery across basically all major categories. We believe that under the base effect in 4Q23, coupled with the recovery pace of consumption itself, overall consumption data will likely improve further.

    　　After earlier pullbacks, the overall valuation of consumer names has reached a reasonable and subdued level. We suggest paying attention to opportunities arising from valuation rollover.

    　　In Aug, the 2Y CAGR of retail sales increased MoM and beat expectations.

    　　In Aug, China’s total retail sales of consumer goods reached Rmb3,793.3bn, up by 4.6% YoY (+2.1ppts MoM), higher than market expectations of a 3.0% YoY increase. Adjusting for the base effect, the two-year average growth rate was 5.0% (+2.4ppts MoM). The total retail sales of goods above the designated size stood at Rmb1,333.6bn, up by 2.5% YoY (+3.0ppts MoM), or up 2.3% YoY (+2.2ppts MoM) excluding retail sales in the automobiles and petroleum category. By region, the retail sales of urban consumer goods increased by 4.4% YoY (vs two-year average growth of 4.9%, +2.4ppts MoM), and that of rural areas increased by 6.3% YoY (vs two-year average growth of 5.6%, +2.4ppts MoM). By category, retail sales of goods were up by 3.7% YoY (+2.7ppts MoM) (vs two-year average growth of 4.4%, +2.3ppts MoM), and that of catering was up 12.4% YoY (-3.4ppts MoM) (vs two-year average growth of 10.4% YoY, +3.6ppts MoM), which has been continuously rising since the low in May. The cumulative growth rate of retail sales of services in 8M23 increased by 19.4% YoY, with the growth rate decreasing by 0.9ppts from that in 7M23.

    Automobiles: Production and sales bucked the trend in Aug.

    　　In Aug, auto sales of entities above designated size increased by 1.1% YoY (-14.8ppts YoY, +2.6ppts MoM; vs two-year average growth of 8.2%, +4.3ppts MoM). According to data from the China Association of Automobile Manufacturers (CAAM), total auto sales in Aug increased impressively by 8.4% YoY and by 8.2% MoM. Despite the high base in the same period last year, the YoY increase was still significant, indicating strong overall demand.

    　　The production and shipment in Aug rose significantly compared to Jul, indicating a recovery from lackluster demand in the off-season.

    Consumer staples: 2Y CAGR increased MoM, and supermarket sales continued to decline.

    　　In Aug, the retail sales of grain, oil, and food of entities above the designated size increased by 4.5% YoY (-3.6ppts YoY, -1.0ppt MoM; vs two-year average growth of 6.3%, +0.4ppts MoM). The retail sales of daily necessities went up 1.5% YoY (+2.5ppts MoM, -2.1ppts YoY; vs two-year average growth of 2.5%, +2.7ppts MoM). In 8M23, the online retail sales of food/clothing/goods increased by 8.4%/10.9%/9.2%, respectively (vs +8.7%/+12.0%/+9.5% in 7M23). In 8M23, the sales of convenience stores/specialty shops/brand　　specialty shops/department stores grew by 7.3%/4.1/3.1%/7.9% YoY, while the sales of supermarkets decreased by 0.5% YoY. Consumer discretionary: 2Y CAGR increased MoM; the real estate value chain remained sluggish but declines have narrowed.

    　　In Aug, the retail sales of cosmetics increased by 9.7% YoY (+16.1ppts YoY, +13.8ppts MoM; vs two-year average growth of 1.3%, +3.1ppts MoM). The retail sales of gold and silver increased by 7.2% YoY (flat YoY, +17.2ppts MoM; vs two-year average growth of 7.2%, +2.4ppts MoM). The retail sales of shoes and knitted clothing increased by 4.5% YoY (-0.6ppts YoY, +2.2% MoM; vs two-year average growth of 4.8%, +3.3ppts MoM). In the real estate-related industries, the retail sales of household appliances/audio-visual devices decreased by 2.9% YoY (-6.3ppts YoY, +2.6ppts MoM; vs two-year average growth of 0.2%, -0.4ppts MoM), while those of furniture were up by 4.8% YoY (+12.9ppts YoY, +4.7ppts MoM; vs a two-year average decline of 1.9%, +1.3ppts MoM). The retail sales of construction and decoration goods were down by 11.4% YoY (-2.3ppts YoY, -0.2ppts MoM; vs a two-year average decline of 10.3%, -0.7ppts MoM).

    Potential risks: Uncertainties over the pandemic; sharper-than-expected economic growth slowdown leading to a higher-than-expected decline in consumer demand; policy risks in various industries; inflation overshooting; margin erosions due to insufficient price hikes.

    Investment strategy: In Aug, the two-year average growth rate of social retail sales of consumer goods showed a rebound from the previous month. In terms of sub-categories, the growth rates of consumer staples, consumer discretionary goods, and catering all increased, and the performance of the real estate chain diverged.

    　　On the whole, consumption keeps recovering, albeit at a weak pace, and we believe that the overall trend is positive. Structurally, we recommend prioritizing sector leaders with low valuations but visible long-term operating advantages. Driven by rising policy expectations or continued fundamental recovery, there may be opportunities for valuation rollover, including liquor, sports, the consumer internet, duty-free shopping, catering, breeding, food, medical cosmetics, etc. At the same time, we also call attention to subsequent macroeconomic recovery-driven opportunities in procyclical sectors, such as human resources, home furnishing and other industries. In addition, we suggest keeping tabs on the sustainability of prospering sectors in 2023, including gold and jewelry, the catering supply chain, snacks, etc.

    　　Our recommended consumer industry portfolio for 2H23 includes: Giant Biogene (02367.HK), Lao Feng Xiang (600612.SH), 361 Degrees (01361.HK), Giantstar Farming (603477.SH), Anjoy Foods (603345.SH), M&G Stationery (603899.SH), Kweichow Moutai (600519.SH), H World (HTHT.O/01179.HK), PDD (PDD.O), China Pet Foods (002891.SZ), Meituan (03690.HK), Proya (603605.SH), Muyuan Foods (002714.SZ), Qianweiyangchu Food (001215.SZ), Vinda Int'l (03331.HK), Baiya Sanitary Products (003006.SZ), CTG Duty Free (601888.SH), Mengniu Dairy (02319.HK), Joeone (601566.SH), and Shiyuan Electronic (002841.SZ).