Open Source Securities: It is expected that the food and beverage sector will shift towards the mainstream in the next 25 years, with stronger leaders.

Open source securities released a research report, stating that looking ahead to 2025, the main trend in the food and beverage industry is still consumer recovery. Based on the recovery path projection, it is expected that by 2025, the improvement in economic activity will boost business consumption, and the increase in consumer purchasing power will lead to consumption upgrades. From a valuation perspective, after a previous correction, the food and beverage industry has entered a reasonable range, with enterprise valuations generally at relatively low levels in recent years. It is predicted that by 2025, as the macroeconomic environment gradually improves, industry valuations may stabilize and rise, while the sector still needs to focus on performance growth as the primary factor, and it is recommended to adhere to the principle of certainty. The trading strategy for the food and beverage industry in 2025 includes four main lines: choosing economically cyclical and fundamentally stable stocks, focusing on sub-industry leaders; paying attention to industries that are still in a dividend period due to rising prosperity; seizing investment opportunities in companies experiencing a turnaround due to their own business cycles; and positioning in varieties with lower upstream costs. The main points of Open Source Securities are as follows: Market Performance: Food and beverage companies have underperformed the market since the beginning of the year, with the decline in market value mainly attributed to valuation contraction. From January to October 2024, the food and beverage sector declined by 4.4%, underperforming the Shanghai and Shenzhen 300 Index by about 28.5%. Among the sub-sectors, the soft drinks sector saw a good increase (+33.9%), with snacks (+14.7%) and condiments and fermented products (+9.5%) performing relatively well. Pre-processed food (-19.3%) and baked goods (-17.5%) showed weaker trends. The PE ratio for the food and beverage industry in the first 10 months of 2024 fell by 19.9% compared to the end of 2023, with an expected net profit growth of 13.6% in 2024, resulting in a 9.0% decline in market value since the beginning of the year. Overall Assessment: Weak consumption, short-term pressure From a macro perspective, China's GDP growth rate was +4.6% in Q3 2024, a decrease from the second quarter, with a Q1-Q3 GDP growth rate of +4.8% remaining within market expectations. The total retail sales of consumer goods in China in Q3 2024 increased by +2.5% year-on-year, down 0.2 percentage points from Q2 2024, reflecting a continued weak recovery in consumer demand. The macroeconomic growth rate is consistent with the social retail data, indicating pressure on consumption in the third quarter. Looking ahead to the Spring Festival in 2025, it is anticipated that the favorable consumer scene will be released, and with a mismatch in the timing of the Spring Festival, some restocking may be postponed to Q4 2024, leading to a possible improvement in consumption growth compared to the third quarter. From a micro perspective, industrial performance is under pressure, with production, income, and profit growth rates gradually slowing down. Summary of 2024: Performance under pressure, increasing differentiation The food and beverage industry continued to be under pressure in 2024. After a strong sales period during the Chinese New Year, the sector entered the off-season in March, with the fundamentals starting to decline. From the financial performance perspective, the overall revenue growth of listed food and beverage companies in Q2 and Q3 2024 (+0.0%, +3.5%) decreased compared to Q1 (+7.0%), with the Baijiu sector showing particularly noticeable performance declines. Changes in mutual fund holdings also indicate that starting from Q2 2024, funds significantly reduced their positions in food and beverage stocks, and actively managed equity funds continued to reduce their allocations in Q3. At the end of September, a combination of economic measures was implemented, leading to a more optimistic outlook on the macroeconomic situation. With the low valuations of the food and beverage sector, as a cyclical sector, it attracted more funds as the economic outlook shifted. Throughout the year, companies faced increased operational pressures, partly due to the continued weakening of consumer demand throughout the year, and partly due to some companies reducing the burden on channels and weakening the requirement for payment completion rates. Additionally, the industry also exhibited two characteristics: further widening performance differentiation, with most leading companies maintaining stable performance, such as Kweichow Moutai, Foshan Haitian Flavouring and Food, continuing to achieve stable growth in line with market expectations. However, some second-tier brands showed a deceleration in revenue growth, highlighting the pressure from the external environment while the market share of leading companies continued to increase. On the other hand, mass consumer goods demonstrated strong resilience, with local wines in the Baijiu sector showing good growth, and outstanding performance from Eastroc Beverage. Risk warning: Risk of macroeconomic fluctuations, risk of lower-than-expected consumer recovery, risk of fluctuating raw material prices.