BOC International: Pay attention to the turning point of the food and beverage industry cycle, seize structural opportunities in the context of economic recovery.

BOC International released a research report stating that the valuation of the food and beverage sector reached a historical low in September and stabilized and rebounded. The percentage of holdings in 3Q24 funds continued to decline compared to the previous quarter, and the sector remains under-allocated. In 2025, the operating goals of liquor companies will be more pragmatic, with a slowdown in production at the front end to ease pressure on distribution channels. The business model of liquor companies is excellent, with leading companies increasing their willingness to distribute dividends. With the reduction of inventory in distribution channels and improvement in demand, company profits are expected to gradually recover and emerge from the bottom of the valley. In 2025, popular brands will benefit from the recovery of the catering industry, presenting structural investment opportunities overall. It is recommended to pay attention to different sub-industry turning points during the economic recovery and select high-quality stocks. The bank recommends (1) Liquor: recommend Kweichow Moutai (600519.SH), Wuliangye Yibin (000858.SZ), Shanxi Xinghuacun Fen Wine Factory (600809.SH); (2) Popular brands: recommend Tsingtao Brewery (600600.SH), Cheng De Lolo (000848.SZ), Jonjee Hi-Tech Industrial And Commercial Holding (600872.SH). BOC International's main points are as follows: The valuation of the food and beverage sector reached a historical low in September and stabilized and rebounded. The percentage of holdings in 3Q24 funds continued to decline compared to the previous quarter, and the sector remains under-allocated. In terms of valuation, influenced by changes in the economic environment and insufficient consumer confidence, the valuation of the food and beverage sector in 2024 has fallen compared to the same period last year. As of December 1, the valuation (PE-TTM) of the food and beverage sector was 21.5X, with a price-to-earnings ratio relative to the Shanghai and Shenzhen 300 index of 1.7X. After reaching a historical low point since 2016 in September, the sector's valuation has gradually stabilized and rebounded, from 17.0X on September 20, 2024 (corresponding to a historical percentile of 0.3% in PE valuation in the past five years) to the current 21.5X (corresponding to a historical percentile of 7.3% in PE valuation in the past five years). In terms of fund holdings, the food and beverage sector ranks low compared to other industries, with a relatively low percentage of holdings in 3Q24 active equity funds. Among the top ten-heavy stocks in 3Q24, only Kweichow Moutai stocks were held in the food and beverage sector, while the holdings of liquor decreased. With a macroeconomic pressure background, consumer demand weakening, and supply-demand contradictions in the industry highlighted, a series of macro policies have been introduced since the third quarter of 2024, with expectations for improved domestic demand. As a pro-cyclical sector, the food and beverage sector is expected to benefit from improvements in the macroeconomic environment, and sector sentiment may rebound. In 2025, the operating goals of liquor companies will be more pragmatic, with a slowdown in production at the front end to ease pressure on distribution channels. The excellent business model of liquor companies, the increased willingness of leading companies to distribute dividends, and the improvement in demand and distribution channels indicate that company profits are expected to gradually recover and emerge from the bottom of the valley. The current industry shows characteristics of reaching the bottom, with leading companies showing increased willingness to distribute dividends and long-term value. In terms of revenue and net profit growth in the liquor sector in 1-3Q24, it was 9.2% and 10.7% respectively, with growth of 0.5% and 2.1% in 3Q24, indicating a significant slowdown in sector performance. The bank expects pressure on performance in 4Q24, with expectations for improvement in the first quarter of 2025 due to the boost during the Chinese New Year season, although the year-on-year growth rate may remain stable. Compared to the previous liquor cycle, the characteristics of reaching the industry's bottom are evident, with liquor companies voluntarily reducing speed under the background of stock competition, setting more realistic targets for the coming year. The bank predicts that in 2025, the industry will continue to focus on destocking and stimulating sales, with continued pressure on distribution channels, combined with the move of liquor companies towards refined management, company profits are expected to gradually recover and come out of the cycle bottom. The unique business model of the liquor industry gives them a strong ability to realize performance, especially the leading liquor companies have strong abilities in product quality upgrades and price control. In the current industry landscape of concentration, differentiation, and pressure, leading liquor companies have obvious advantages. With confidence comparable to gold, leading liquor companies have begun to distribute substantial mid-term dividends, with promises of a high dividend rate in the next three years. According to the bank's calculations, the dividend yields of Maotai and Wuliangye Yibin are approximately 3.4% and 4.0% respectively, both higher than the ten-year treasury bond yield. The bank believes that liquor assets are of high quality, leading companies have strong operational resilience, and with the addition of high dividend policies, leading companies have long-term value for investment. In 2025, popular brands will benefit from the recovery of the catering industry, presenting structural investment opportunities overall, and it is recommended to pay attention to different sub-industry turning points. In terms of beer, the beer industry in 2024 faced pressure on quantity and price and showed features of a weak peak season. There was a clear differentiation between companies, with Yanjing and Zhujiang benefiting from large single-volume sales, performing better than other companies. The bank believes that from the perspectives of competition improvement and capacity, the beer industry's structural upgrading process still has resilience, and the raw material cost dividend is expected to continue until 2025, with profit recovery expected and attention to the bottom reversal opportunities for leading beer companies under low base conditions. Regarding condiments, the adjustment of the condiment industry is nearing completion, with demand gradually recovering each season. Based on offline supermarket and retail terminal data monitored by Ma Shangying, the decline in sales revenue of basic seasonings and blended seasonings narrowed in 3Q24. Looking at the performance of different companies, there is a trend of stronger performance by leading companies in the overall industry, with Haitian benefiting from channel reforms and squeezing market share of other brands, showing significant performance advantages over other basic seasoning products. The blended seasoning industry maintains a growth trend, with profit recovery following cost dividends. Leading companies actively seek diversified development, further segmenting the consumer track. 4Q24 is the peak season for blended seasonings, with revenues expected to improve each quarter. In the dairy industry, the overall pressure in the dairy industry in 2024 was significant, with impairment losses and deterioration of gross sales margins putting pressure on overall sector profitability. Compared to the previous cycles, the current cycle of raw milk is slow in clearing capacity, and demand has weakened.The situation of supply and demand imbalance in the dairy industry is worsening, and the adjustment time is longer. The transmission speed of supply and demand in the dairy industry is relatively fast, and there is a strong linkage between prices upstream and downstream. In the first half of 2024, provinces have started adjusting production capacity, and the industry predicts that by the second half of 2025, there is expected to be a balance between supply and demand for raw milk. In the third quarter of 2024, as the end of the destocking of channels by leading dairy companies approaches, end prices are gradually stabilizing, and the performance of the industry is expected to improve on a quarter-over-quarter basis, establishing an upward trend in the business cycle.Leisure food: After the epidemic, affected by the economic environment, the domestic leisure snack market has shifted to a "buyer's market" driven by consumers, and emerging snack channels with cost-effective features have emerged. Influenced by channel changes, different types of companies have varied performances, with companies actively embracing emerging channels and those with faster channel transformation speeds having a competitive advantage. With the early Spring Festival in 2025, 4Q24 leisure snack companies have entered the stocking phase of the Chinese New Year festival ahead of schedule, and performance is expected to accelerate on a quarter-on-quarter basis. In terms of industry development stages, the industry believes that leisure snacks can still enjoy the benefits of channel reform and the benefits of large single-product volume in the short term. Risk Warning Macroeconomic fluctuations, high channel inventory, fluctuating raw material prices.