CITIC SEC: Volkswagen's basic fundamentals are about to reach bottom, focusing on the dairy and catering sectors.

CITIC SEC released a research report stating that the demand for consumer goods in 2026 is expected to gradually bottom out and rebound, and the decline in prices is expected to narrow. However, there may be limited room for upward recovery. With industry competition intensifying and the decline in raw material costs diminishing, there may be uncertainties in the profit trends of some sectors. 2026 is expected to be a stage where the fundamentals of consumer goods are at a bottom and in a left-side investment phase. Investment recommendations are made from three dimensions: one is the dimension of bottoming out fundamentals and bottom valuation, one is the dimension of growth prosperity, and the last one is the dimension of high dividend stocks. The main points of CITIC SEC are as follows: The demand for consumer goods in the first three quarters of 2025 continued to be weak, with intensified competition, and the fundamentals are expected to bottom out in 2026. In 2025, the demand for consumer goods continued to be weak in the sector, while competition intensified, leading to a simultaneous decline in both quantity and price in the industry. In 2026, we hold a cautiously optimistic view on the demand side of consumer goods. We believe that the majority of the industry has experienced two consecutive years of simultaneous quantity and price declines, with channel inventories basically squeezed out and gradually returning to healthy levels. Considering the stabilization trend of consumer goods demand in Q3 2025 and the fact that 2026 is a peak consumption year (with most of the Spring Festival stocking for 2026 and 2027 being reflected in 2026), we are optimistic that the industry's end-demand volume in 2026 is expected to stabilize compared to the previous year. However, considering the continuing weak demand and the trend of cost-effective consumption, the terminal prices of consumer goods in 2026 may still face some pressure. But considering that the intensity of industry competition has not increased, the decline in prices is expected to be significantly narrower than in 2025. Based on the judgment of bottoming out fundamentals, we recommend focusing on the dairy sector and the catering supply sector, which have undergone large price adjustments in the past 2-3 years and whose static valuations are at historical lows, benefiting from the rebound in domestic demand bringing about both performance and valuation increases. Dairy products: Demand improvement in raw milk supply expected to stabilize in 2026. In the first three quarters of 2025, the demand for liquid milk was weak due to the weakening purchasing power, continuing to decline year-on-year, but the rate of decline narrowed compared to 2024, while prices continued to fall due to oversupply of raw milk and intensified competition. With the simultaneous decline in quantity and price of liquid milk, the liquid milk revenue of dairy companies decreased by high single digits on a year-on-year basis, but with continuous destocking of raw milk capacity, the improvement of supply and demand for raw milk and the slowing down of milk prices. Low-temperature liquid milk, B-end cheese, and infant formula demonstrated relatively good demand resilience in the first three quarters of 2025. Looking ahead to 2026, we believe that: 1) The turning point in the supply and demand of raw milk is expected to arrive, and milk prices are expected to stop falling and rebound in the second half of 2026; 2) The demand for liquid milk is also expected to stop falling and rebound; 3) With no more cost benefits and easing competition, dairy company price promotions are expected to decline and the decline in prices is expected to narrow. We are optimistic about the stabilization of the fundamentals of the liquid milk industry in 2026. Snacks: The channel dividends continued in 2025, suggesting focusing on growth stocks in 2026. Although the flow of e-commerce channels in the snack industry slowed down in 2025 and the flow of traditional channels declined, there are still many bright spots in the industry structure - the growth dividend of large-scale snack channels continued, membership supermarket channels accelerated penetration, and the growth prospects of konjac categories are relatively high. In 2025, with some increase in raw material costs and intensified competition, the profitability of the sector weakened. Looking ahead to 2026, we believe that the prosperity of the konjac category and the dividend of large-scale channels are expected to continue, and the sector's market is expected to be dominated by individual stocks. Catering Supply Chain: Short-term prosperity bottoming out, waiting for marginal improvement in 2026. The catering supply chain sector is highly related to the business climate of downstream catering industries. In the first three quarters of 2025, the overall business climate was weak. Against this background, the catering supply industry presents structural highlights: 1) The leading players maintain resilience and continue to increase their market share; 2) Accelerated mergers and acquisitions seeking expansion in categories and channels; 3) Layouts in new channels such as Sam's Club, Hema, and large-scale retailers are gradually paying off; 4) Some companies have made new progress in overseas business. On the profitability side, scale effects resulting from demand and competition, as well as cost inputs, are the main drag factors, with overall pressure on costs not significant (seasoning and light catering chain sectors have dividends). Looking ahead to 2026, we believe that the industry's business climate is expected to have bottomed out, and signals of marginal improvement are expected to be released from a company perspective in the short term, such as changes in temperature, new channel development, and external mergers, while competitive pressures in the industry are expected to bottom out and factors hindering profitability are relatively alleviated. If there is an improvement in demand, performance is elastic on the earnings side. Beverages: Industry demand expected to rebound in 2026, focusing on structural opportunities. In the first three quarters of 2025, demand in the beverage industry fluctuated, with moderate steady growth in H1 25, and a negative turnaround in industry retail sales growth from Q3 due to the impact of price wars on online food delivery platforms, with healthy and functional categories performing better than other categories. With weakening demand and favorable costs, industry competition intensified, with most companies achieving a year-on-year increase in net profit margins after increasing their investment. Looking ahead to 2026, considering that delivery subsidies may decline or narrow down, we expect beverage industry demand to rebound, with year- on-year growth reaching around mid- to high single digits; the intensity of industry competition mainly depends on market demand and raw material prices, and if demand remains good and raw material prices remain stable/ increase, competition may slow down. Investment recommendations: 1) leading companies in high-growth tracks with sustained performance growth; 2) leading high dividend stocks with stable income growth; 3) companies with expected bottoming out and rebounding fundamentals. Risk factors: Decline in consumer prosperity; catering recovery below expectations; price increases falling short of expectations; intensified industry competition; unforeseen impact of emerging channels; continuous increase in raw material prices; food safety issues.