Guotai Junan: There will be a major shift in the Drive of consumer goods companies' ROE.

Guotai Junan Securities released a research report stating that, compared to Europe, America, and Japan, the high ROE of Chinese consumer goods companies mainly comes from higher net profit margins and asset turnover rates. Referring to the historical development of consumer goods in Europe, America, and Japan, the team believes that the Chinese consumer goods industry is currently in a period of adjustment before a turning point, undergoing a "lean muscle" process. In the medium to long term, it is expected to gradually enter a stable stage, and excellent companies that have accumulated operational management capabilities are expected to achieve an ROE increase through financial leverage and operational efficiency improvements. In addition, the current round of dividend investment is mainly driven by the denominator, providing certainty in valuation, with a lower impact from the numerator. Sectors such as food and beverages, especially liquor, are relatively cyclical in nature, with market risk preference at a low level, and investors are demanding compensation for uncertainty. The DRIVE of ROE for consumer goods companies is undergoing a major shift. Compared to Europe, America, and Japan, the high ROE of Chinese consumer goods companies mainly comes from higher net profit margins and asset turnover rates. Chinese companies have achieved higher efficiency and profitability through expanding product categories, channels, and pricing leverage in a period of high demand growth and labor cost dividends in the domestic market, with significantly lower equity leverage than European and American companies. Referring to the historical development of consumer goods in Europe, America, and Japan, Guotai Junan Securities believes that the Chinese consumer goods industry is currently in a period of adjustment before a turning point, undergoing a "lean muscle" process. From an ROE perspective, Guotai Junan Securities believes that during this stage, consumer goods companies will experience a marginal decline in net profit margins and asset turnover rates due to weakening domestic market growth dividends and rising labor costs. In the medium to long term, they are expected to gradually enter a stable stage. Excellent companies with established operational management capabilities are expected to achieve an ROE increase through financial leverage and operational efficiency improvements, while gradually increasing their dividend payout ratios, demonstrating investment value. In terms of valuation, the current market trend is mainly driven by the denominator, enjoying a premium due to certainty. Reviewing the three previous bull markets in A-shares, the 2006-2010 cyclical product market trend represented by the "Fifth Flower" of the period, the 2014-2015 "Bull+Reform Bull" trend jointly driven by the numerator and denominator, and the 2019-2021 market trend of blue-chip stocks, the contribution of the numerator was significant. In contrast, the current dividend investment is mainly driven by the denominator, providing certainty in valuation, with a lower impact from the numerator. Sectors such as food and beverages, especially liquor, are relatively cyclical in nature, with market risk preference at a low level. Investors are demanding compensation for uncertainty. From a short-term sector trading perspective, the impact weight of growth on valuation is decreasing, and the market is more focused on the stability and sustainability of growth rather than short-term growth rates. Going abroad, offering reasonable prices, and innovating are the paths for companies to cope with it. The consumer goods industry is pregnant with structural opportunities during the transition period. Drawing from the experience of leading Japanese consumer goods companies enduring cycles, going abroad, offering reasonable prices, product innovation, and business diversification are paths that Chinese consumer goods companies can learn from. Through these paths, Japan's consumer goods industry has seen a number of leading companies with strong performance and stock prices defying the trend. However, the transformation and development of companies require a process. Taking the example of the leading Japanese affordable consumer goods company, its journey to success was not instantaneous but took several years, even decades, to gradually grow after changes in the macro environment. Investment recommendations: Referring to the development process of overseas consumer goods companies, Guotai Junan Securities believes that the following types of consumer goods leaders will maintain consistent and stable growth in the future: 1) Categories with long and stable cycles and marginal improvement in competitive landscape, such as beverage leaders and seasoning leaders; 2) Industries with sufficient competition, stable landscape, obvious manufacturing advantages, and the ability to go abroad. 3) Brands with strong brand power, where supply determines demand, such as high-end liquor leaders. 4) Following the trend of cost-effectiveness, gradually emerging affordable consumer goods leaders, but still need to go through the process of training and nurturing growth. 5) Companies with the ability to go abroad and continuously innovate products, seizing opportunities for developing innovative categories. Risk warning: Increase in macroeconomic fluctuations; intensification of market competition; food safety risks.