Huaxi: The appreciation of the exchange rate is beneficial for domestic assets. Focus on the three-fold resonance opportunities in the food and beverage sector.

Huaxi released a research report stating that the recent RMB exchange rate has continued to strengthen. Reviewing history, the food and beverage sector usually outperforms the market during appreciation cycles. This round of appreciation is expected to drive the sector towards a resonance repair in terms of costs, demand, and valuation through three paths: lowering import costs, boosting domestic demand, and attracting foreign capital to increase allocation, benefiting related themes. Huaxi's main points are as follows: Event The RMB exchange rate has accelerated appreciation recently, with the offshore rate breaking 7 on December 25, and the onshore RMB reaching 6.96 on January 22. With the enhanced intrinsic economic momentum and improved export competitiveness, the RMB exchange rate is expected to continue to appreciate. Looking back at two rounds of RMB appreciation cycles in May to November 2020 and November to December 2022 The food and beverage sector has achieved excess returns relative to the Shanghai and Shenzhen 300 index of 18% and 12% respectively, showing good performance and outperforming the Shanghai and Shenzhen 300 index significantly. This round of RMB appreciation cycle is also expected to drive the sector towards a triple resonance of cost reduction, demand improvement, and valuation recovery. In terms of costs, RMB appreciation will lower the prices of imported raw materials, reducing manufacturing costs and improving profits. Core raw materials involved include soybeans, palm oil, oats, barley, and nuts. In terms of demand, domestic demand recovery is the underlying support for the strong exchange rate. RMB appreciation will further reduce companies' restocking costs, shifting the industry from "passive destocking" to "active restocking". Restocking and expanded production will strengthen domestic demand resilience, forming a positive cycle. As essential consumer goods, food and beverages have a stronger certainty in domestic demand recovery, and the business climate is expected to continue to improve. In terms of funds, with the RMB appreciation cycle, liquidity remains ample, and the influx of foreign capital into A-shares is strengthening, bringing a liquidity premium to the sector. As one of the consumer sectors with a high proportion of foreign holdings, the food and beverage sector is likely to see a valuation recovery brought about by increased foreign capital allocation. Investment advice Benefiting from the triple resonance of the sector, focus on three main themes: 1) cost dividend, key recommendations include Guilin Seamild Foods, Ligao Foods Co., Ltd, Shanghai Milkground Food Tech, Chacha Food, H&H, etc.; 2) enhanced business climate, key recommendations include Anjoy Foods Group, Zhengzhou Qianweiyangchu Food Co., Ltd, YOURAN DAIRY, CH MODERN D, New Hope Dairy, Fujian Wanchen Food Group; 3) valuation recovery, key recommendations include Inner Mongolia Yili Industrial Group, MENGNIU DAIRY, Sirio Pharma, WL DELICIOUS, Yanker Shop Food. Risk warning: RMB exchange rate fluctuations exceed expectations, international commodity prices rebound, domestic demand recovery falls short of expectations.