CITIC SEC Consumer Industry 2025 Investment Strategy: Expecting to Lead and Waiting for the Turning Point.

CITIC SEC released a research report stating that the overall domestic demand is expected to be weak in 2024, with significant price pressures. The anticipation of a shift in policies will have a significant impact on the short-term elasticity of consumer core demand. The current recommendation is to focus on sectors that are both offensive and defensive, such as consumer internet, undervalued dairy products with high returns and potential for stable operations, and mass dining, which are essential sectors. Considering the anticipated increase in consumer demand, sectors with clear cyclical characteristics such as restaurant supply chains, alcohol, human resources services, and hotels are expected to show resilience and it is advisable to gradually increase allocation. The recommendation is to gradually transition from defensive to more elastic sectors in consumer allocation from Q4 2024 to Q2 2025. In the medium to long term, it is important to continue monitoring structural trends such as rational consumption, happy life, technological upgrades, as well as opportunities for overseas expansion, market penetration, and mergers and acquisitions. Key points from CITIC SEC: Review of 2024: Weak domestic demand, strong policy impact. In 2024, overall consumer demand was weak, with significant price pressures. Compared to 2023, even the relatively strong "two-head" consumer sectors faced pressures. Structurally, there was a continued increase in "value-for-money" consumption, resilient service sector consumption, and a rebound in durable goods consumption driven by the "replace the old with the new" policy. Prior to the "924" policy shift, market sentiment towards the Chinese consumer market was pessimistic, leading to a significant decrease in consumer valuations. The rapid turnaround of consumer expectations was driven by the intensive implementation of policies that reversed economic expectations. However, current valuations are still at reasonable levels. Outlook for 2025: Focus on policy effectiveness, await the turning point in economic conditions. The elasticity of consumer-related industry valuation repair in the short term primarily depends on the overall expectations of the domestic macroeconomic environment. Increasing economic expectations often magnify the elasticity of consumer valuation repair, while decreasing economic expectations will limit room for repair. With a clear policy turning point domestically, the core focus of the market will continue to be on the timing and intensity of policy implementation, as well as the ability of policies to support the economy in 2025, the recovery of household demand, and the restoration of corporate profitability. Currently in a period of policy observation, the expectation of related policies such as continuing the "replace the old with the new" policy to drive consumer demand is crucial for the short-term recovery of consumption. Based on consumption stimulus measures such as "replace the old with the new" and "consumption vouchers," and historical usage patterns, the favorable consumption categories include dining, tourism, shopping (platform, supermarkets, etc.), home appliances, and home furnishings. Consumer sectors such as alcohol, human resources, dining, and hotels are expected to benefit from actual economic recovery and anticipated household income growth. Medium to long-term perspectives: Focus on three structural trends in demand, and overseas expansion and mergers and acquisitions in the supply side. Structural trends in the Chinese consumer market are emerging: 1) Consumers are becoming more rational, with a parallel upgrade in quality and consumption replacement; 2) Consumers are increasingly pursuing happiness in life, willing to pay for spiritual satisfaction and emotional value; 3) Technological advancements and iterations are driving new consumption directions, with two key focus areas being digital economy and biotechnology. The focus should be on smart home applications in the digital economy and iterative opportunities in agriculture, food, and beauty under synthetic biology. On the supply side, attention should be given to businesses' ability to explore incremental market spaces. Both international and market expansion as well as mergers and acquisitions are expected to be significant tools for high-quality consumer companies to achieve rapid growth. Consumer Industry Investment Strategies for 2025: From the emphasis on domestic demand under the direction of economic restructuring to the issuance of various consumer vouchers and subsidies by local authorities or ministries, regardless of the intensity of specific implementation, clear policy attitudes drive expectations ahead. With consumer valuations and holdings at low levels, consumption is expected to bounce back in the dual context of valuation and holding. Although consumer valuations have experienced short-term increases, they are still at reasonable levels. On the operational side, even without considering potential policy stimulation, most consumer industries, especially those in essential sectors, are expected to stabilize against the backdrop of easing base pressures in Q4 2024, with Q2 2025 likely to be a bottoming window for most consumer industries under pressure. The current recommendation is to focus on sectors that are both offensive and defensive, such as consumer internet, undervalued dairy products with high returns and potential for stable operations, and mass dining, which are essential sectors. Considering the anticipated increase in consumer demand, sectors with clear cyclical characteristics such as restaurant supply chains, alcohol, human resources services, and hotels are expected to show resilience, and it is advisable to increase allocation gradually. The sustainability and upside potential of the market will depend on the specific effectiveness of subsequent policy implementations. Currently, with a clear policy shift driving a reversal turning point, the anticipated increase in consumer allocation value under expectation-ahead is certain, and the recommendation is to transition consumer allocation strategies from defensive to more elastic sectors from Q4 2024 to Q2 2025. Risk factors: Slow recovery of the domestic consumer market; lower-than-expected downstream demand; geopolitical risks; natural disaster risks; lower-than-expected global liquidity; significant exchange rate fluctuations; volatile product prices; substantial increases in raw materials and logistics prices; unexpected domestic and foreign policy risks; increased industry competition; food safety issues; risks of overseas investments; risks of technology research and development; lower-than-expected cost and expense control; slower-than-expected business or capacity expansion; negative publicity risks for top anchors; risks of pressure from major clients on pricing, and so on.