CITIC SEC: Consumer sector rebound is obvious. It is recommended to transition from a defensive and offensive configuration gradually to a flexible configuration.

CITIC SEC released a research report stating that under the catalysis of factors such as the continued stabilization of real estate data, expected subsidies for service consumption policies, and the relaxation of financing channels for consumption enterprises, the consumer sector has rebounded significantly in recent days. Whether it is to increase residents' income and reduce burdens, or to provide more direct consumption subsidies, the policy direction of increasing demand and expanding domestic consumption is very clear. The stabilization of the real estate market and economic recovery under debt restructuring will also directly benefit the rebound of consumer sentiment. On the investment side, after several years of weak performance, the consumer industry is rapidly stabilizing, and under a pessimistic sentiment, valuations are at a low level. The opportunities for consumer recovery by 2025 are clear. Key points of CITIC SEC are as follows: Expectations of policies and stabilized data lead to a clear rebound in consumption Recently, there has been a clear rebound in consumption. On February 27th, the CSI A-share first-level industry index for food and beverages, consumer services, agriculture, forestry, animal husbandry, fishery, light industry manufacturing, commerce and retail, and textile and clothing rose by 2.22%, 1.15%, 0.10%, 1.30%, 2.22%, and 2.22% respectively. Corresponding to the A-share Shanghai Composite Index / Shenzhen Component Index / Growth Enterprise Market Index, the changes were +0.23% / -0.26% / -0.52%; in the Hong Kong market, essential consumption / non-essential consumption increased by 1.90% / 0.10%, while the Hang Seng Index / Hang Seng Technology Index changes were -0.29% / -1.22%. Why is consumption rebounding? 1) Continued stabilization of real estate data. In the first 7 weeks of 2025, the total transaction price of land in the top 100 medium-sized cities in China increased by 55% compared to the same period in 2024, with an average premium of 7.2% (compared to 2.5% in 2024). According to leading brokerage platforms such as Beike, the transaction volume of second-hand houses in 82 cities continued to increase after the Spring Festival. "Stabilizing the stock and property markets" is a quantified policy requirement clearly stated at the Central Economic Work Conference. According to the view of the real estate team of the CITIC SEC Research Department, the recovery of the current real estate market is not only the recovery of seasonal sales figures, but also the beginning of a new cycle in the real estate market under the support of multiple factors such as the decline in new housing supply, stabilization of existing housing supply, and significant decrease in housing financing costs. Under the current structure, the stabilization of the real estate market signifies a strong signal for economic stabilization and recovery, and as an indicator of economic health, consumption is expected to follow suit. 2) Expectations of subsidy policies are expected to expand to the service consumption sector. The Ministry of Commerce announced on February 27 that it will promote the introduction of a series of policies to support household services, digital consumption, sports consumption, and other high-quality supply in the service sector. Based on further strengthening the expansion of the old-for-new policy, the bank expects that the service consumption vouchers being piloted in places like Shanghai will be more widely promoted. Since September 2024, Shanghai (5 billion RMB), Hangzhou (4.3 billion RMB), Sichuan (4 billion RMB), and other places have started using local government funds to distribute consumer vouchers, mainly subsidizing consumption services such as dining and accommodation. These consumer vouchers funded by local government funds and the "old-for-new" policy funded by special treasury bonds work together to provide complementary support policies, and are expected to continue to expand in the future to broaden consumer support coverage. 3) Resilience of consumption is evident, signaling stabilization. After several years of weak performance, the supply-demand structure of consumption has been adjusted and optimized. Even without considering external forces such as policies, the demand for various industries, especially for essential goods, is expected to pass through a low point in 2025 and stabilize. 4) Rotation of funds from "high" to "low". The strong tech sector rally led by DeepSeek after the Spring Festival has created a need for funds to shift to sectors such as consumption. Looking ahead, with the opening of the National People's Congress next week, policy expectations will be a key catalyst in the short term. With continuous policy releases recently and the joint issuance of the "Three-Year Action Plan to Optimize the Consumption Environment (2025-2027)" by multiple departments with the approval of the State Council, regions and departments are deploying comprehensive measures to optimize the consumption environment, effectively boosting consumer confidence and expectations, stimulating the vitality of the consumer market, and improving people's quality of life. The momentum of residents' consumption is showing signs of recovery, and the valuation of key sectors remains low In terms of the fundamental aspects of the industry, since the policy turning point in September 2024, the confidence in residents' assets and income has improved. According to a survey conducted by the CITICS-CLSA CRR team, the expected index of residents' income in January 2025 was 31.4%, an increase of 4.3 percentage points compared to September 2024. First-tier residents, benefiting from increased confidence in assets such as real estate, have more optimistic income expectations. High-frequency data shows that during the Spring Festival period, transportation, movie ticket sales, and tourism total visits and revenue have all increased, retail and catering have also improved compared to the same period last year, and in recent months, the price situation has continued to improve, with the core CPI rising for four consecutive months, all indicating the recovery of residents' consumption momentum. Looking at valuations, as of February 27th, the PE ratios (TTM, excluding negative values) for the food and beverage / consumer services / agriculture, forestry, animal husbandry, fishery / light industry manufacturing / commerce and retail / textile and clothing industries were 21x, 31x, 19x, 21x, 22x, and 20x respectively, representing 60%, 65%, 63%, 93%, 125%, and 111% of the average from 2019 to the present. The valuation of key sectors represented by food and beverages remains low. Reaffirmation of the 2025 consumption allocation view: expectation first, waiting for the turning point Currently, consumer valuations are still at a reasonably low level. At the operational end, even without potential policy-driven actions, with the background of easing base pressure in 2024 Q4, the fundamentals of most consumer industries, especially the essential goods industries, are basically stabilizing, and 2025 Q2 is likely to become a pressure-lowering window for most consumer industries. The institution currently recommends gradually shifting from a balanced offense and defense allocation to a flexible allocation. Balanced offense and defense: consumer internet, undervalued and high-return industries with potential early stabilization such as dairy products and mass catering. Flexible allocation: industries with obvious cyclical characteristics such as the catering supply chain, alcohol, human resource services, and hotels. Currently, the institution prefers companies related to the catering industry chain that are expected to recover first and directions potentially benefiting from policies, such as family planning policies and consumer vouchers. Risk factors: economic slowdown exceeding expectations, leading to a sharper-than-expected decline in consumer demand; changes in policies in various industries exceeding expectations; inflation exceeding expectations, affecting profitability due to inadequate pricing power; the effectiveness of already implemented policies to stimulate consumption falls short of expectations, etc.