Wanlian Securities: Domestic substitution rising in the pet industry, leading to potential benefits for the development of independent brands.

Wanlian Securities released a research report stating that the pet industry in China is large in scale and growing rapidly, with a vast market development space. However, due to starting late, domestic pet companies are still in the process of transitioning from OEM mode to independent brand mode, with foreign brands still occupying a dominant position. In recent years, in many consumer sectors, with the strengthening of the overall strength of domestic companies and the rise of online channels, domestic brands have emerged and overtaken foreign brands, giving rise to many excellent listed companies. This trend will also play out in the pet industry, with the rise of domestic pet brands. Although late, it will not be too late, and the future substitution of domestic brands in the pet industry will become the main investment logic for the industry. It is recommended to focus on investment opportunities in leading pet companies with excellent performance in independent brand building. Wanlian Securities' main points are as follows: Food and medical consumption account for the largest proportion in the pet industry chain The pet industry mainly includes a series of goods and service chains such as pet breeding, pet trading, pet food, pet supplies, pet medical care, pet beauty, pet training, pet insurance, and pet funerals. The upstream of the pet industry chain is mainly focused on pet breeding and trading, mostly operated by individuals, lacking large-scale enterprises; the middle stream includes essential food and supplies for pets, with high market scale and fierce competition, with pet food dominating the industry and being the most benefited sub-sector. The downstream includes pet medical care, grooming, training, and other service enterprises, with an increase in segmented tracks due to the upgrading of consumption demand, mainly run by personal stores, with chain brands still in development. Pet food and medical care cover the long lifecycle of pets, accounting for about 80% of the pet consumer market, of which the proportion of pet food consumption in China has been decreasing year by year, accounting for 50.7% in 2022, and the proportion of pet medical care consumption is steadily increasing, accounting for 29.1% in 2022. Pet food: Main food consumption accounts for the largest share, domestic brands are on the rise Pet food can be divided into main food, snacks, and health supplements, with main food holding a dominant position in the pet food market. According to the data from the "2023 China Pet Food Market Consumption Report," in 2022, the consumption structure of pet food in China includes dog food, snacks, and nutritional supplements, accounting for 68.9%, 27.1%, and 4.0% respectively; cat food, snacks, and nutritional supplements account for 70.3%, 25.4%, and 4.3% respectively. Currently, the concentration of the domestic pet food industry is relatively low, and there is fierce competition between domestic and foreign brands. The operating mode of enterprises in the pet food industry is mainly OEM, with some production companies gradually transitioning from OEM manufacturers to ODM manufacturers with certain product research and design capabilities, and some leading enterprises are expanding towards an OBM independent brand mode. Looking at the segmented categories, 1) the competition between domestic and foreign brands in the main food category is fierce, with consumers' preference for domestic pet food brands gradually increasing. In the long term, there is still significant room for improvement in the concentration of the domestic pet food market; 2) the competition in the pet snack category in China is becoming more concentrated, with local brands successfully breaking through, and the usage rate of top domestic pet snack brands surpassing that of foreign brands, with further advancement expected in the future; 3) Chinese brands have a significant advantage in pet nutritional supplements, with seven Chinese brands ranking in the top ten in usage rates for dog and cat nutritional supplements. Pet supplies: Smart upgrades are the major trend, competition is decentralized with foreign brands dominating Pet supplies mainly include leashes, cleaning and care products, pet mattresses, feeding bowls, pet clothing, pet toys, and more, with many segmented categories. The size of the Chinese pet supplies market has reached 40 billion yuan in 2023, with a CAGR of 13.6% over the past 5 years, far surpassing the global market growth rate. Among them, the penetration rates for pet toys, cleaning and care products, mattresses, food and water bowls are over 60%, while the penetration rates for smart pet products and appliances are relatively low, indicating that smart upgrades will become a major development trend in the future. Due to the broad coverage and numerous segmented categories of pet supplies, the competition landscape in the global pet supplies market is relatively decentralized, with leading companies in pet supplies still dominated by international brands. In China, the market concentration is low, with some domestic enterprises shifting from OEM to developing their own brands. Pet medical care: Growth rate higher than pet food, increasing chain ratio for pet hospitals is the development trend Pet medical care mainly includes upstream pharmaceuticals, vaccines, medical equipment, and supplies, as well as downstream pet hospitals and third-party testing agencies, with pet medical treatment institutions and pet drugs (including vaccines) occupying the largest proportion in the pet medical care industry chain. With the increasing health awareness of pet owners and the rise of scientific pet care and pet health concepts, the demand for pet medical care in China has rapidly increased in recent years, with the market size growing at a rate higher than that of pet food. Looking at the segmented categories, 1) pet drugs and vaccines in China are just getting started, with animal health companies mainly targeting economic animals (pigs, cows, chickens, etc.), and are now accelerating their layout in the pet drug industry; 2) pet medical institutions are mainly divided into small pet clinics, large general pet hospitals, and third-party diagnostic labs. Currently, most pet hospitals in China are small pet clinics. With the increase in the number of pets and the elevation of their emotional status, large pet hospitals will gradually increase. Currently, the chain ratio of pet hospitals in China is still relatively low, and the increase in chain ratio is the future development trend. Risk factors: Risks of industry growth slowing down; risks of intensified market competition; risks of independent brand building falling short of expectations; risks of exchange rate fluctuations.