CITIC SEC: Verification of leading alpha in improvement of supply and demand in social services, anchoring three major trends in travel, pro-cyclical, and high elasticity.

CITIC SEC released a research report stating that the annual report for 2025 and the quarterly report for the first quarter of 2026 show that the service industry consumption presents the characteristics of "supply and demand improvement, leading excess": hotel supply and demand have been improving in sync since the fourth quarter of 2025, with the leading RevPAR returning to positive growth; Macau's gaming revenue in the first quarter of 2026 increased by 14% year-on-year, maintaining a high level of prosperity; the market share in the ready-to-drink beverage industry is concentrating at an accelerated rate, pricing center is moving up, chain rate of food supply is increasing, and the leading companies are realizing advantages through expansion and efficiency improvements; duty-free sales in Hainan's outlying islands in the first quarter of 2026 increased by 25.7% year-on-year, preliminary validation of profit recovery; overall steady revenue growth in the tourism sector, benefiting from holiday policies elasticity; growth driven by human resources outsourcing, with high dependence on macroeconomic prosperity; short-term antitrust policy disturbances in the OTA sector, long-term reinforcement recommendations suggest timing for allocation. In 2026, industry growth drivers focus on operational efficiency improvement, brand iteration, and overseas expansion, with leading companies expected to outperform the industry based on alpha attributes. Maintain three recommended main themes: 1) high-quality targets in hotels and scenic spots in the leisure travel scene; 2) leading companies in the stable-operating and growing catering and duty-free sectors in the pro-cyclical leisure sector; 3) leading companies in the gaming and ready-to-drink beverage sectors with high demand elasticity in the improved prosperity phase; keep an eye on the OTA, human resources, and conference sectors. Key points of CITIC SEC are as follows: OTA: The tourism market has remained highly prosperous, with leading market shares maintaining stability with moderate increase. According to data from the Ministry of Culture and Tourism, China's total tourism expenditure in 2025 reached 6.3 trillion yuan (up 9.5% year-on-year), with 6.522 billion trips (up 16.2% year-on-year), both reaching record highs, with growth 2.6 times higher than that of social zero; inbound tourism benefits from expanding visa waivers, leading the world in growth rate, and the public and business market has gradually recovered since September. Against the backdrop of slowing growth in the fourth quarter of 2025 (domestic tourism revenue grew by 3.3% year-on-year), the leading OTA has continued to outperform. In terms of AI and entry, Ctrip has explored cooperation with Tencent Ecosystem, DBS, Google Gemini, with Tongcheng DeepTrip serving approximately 6.8 million users and connected to Tencent Ecosystem; OTA's supply-side barriers (inventory, performance, data) form a core moat. In terms of regulation, Ctrip has launched "special/platinum" marks and AI price adjustment assistants, with reference to Alibaba and Meituan's antitrust penalty cases expected to be implemented in 4-6 months; our calculations show that every 1ppt reduction in Ctrip's domestic hotel commission rate will impact the company's 2026 net profit by approximately 10%. Looking forward to 2026, the industry's high prosperity will be maintained, but the growth rate will slow down marginally, moving from market share dominance to optimizing take rate and expanding non-trading revenue. Hotel: Profit turnaround under the upgrading of leading hotel groups' products and efficiency improvement. Hotel supply and demand have improved on both sides: data from Hotel Home shows that the national RevPAR on the demand side increased by 3.1% year-on-year in the fourth quarter of 2025 (returning to positive growth for the first time since 2024), further accelerating to +6.7% in the first quarter of 2026 (ADR +5.4%, Occ +0.6ppts), with growth rates of 4.8%, 11.9%, 2.8%, and 8.1% in January, February, March, and April, respectively; on the supply side, the national room growth rate fell from +8.7% in December 2025 to +6.8% in April 2026, driven by the weakening return on investment for new store investments, decreasing availability of high-quality properties, and more rational decisions by franchisees collectively slowing down the growth rate on the supply side. Structurally, the resilience of leisure travel and lower-tier markets is stronger than that of business and high-end markets, with short-term pressure on leading hotel groups due to a higher proportion of business customers, but with business client flows stabilizing since the first quarter of 2026 and catalyzed by the spring break/high season, the seasonality of the turning point is strengthened. The financials of the leading hotel groups improved comprehensively in the fourth quarter of 2025 and the first quarter of 2026. Macau: Stable demand at the beginning of the year, efficiency improvement through reinvestment. According to information from the Gaming Inspection and Coordination Bureau of Macau (DICJ), the gaming industry in Macau maintained high prosperity in the first quarter of 2026, with industry GGR increasing by 14% year-on-year, including a 35% year-on-year growth in the VIP business and a 6% increase in the mass-market business. Since the second half of 2025, the share of the VIP business has continued to rise due to increased bets from core customers, side bets, and luck factors driving up win rates leading to continuous growth in new high-end property capacity, leading industry growth, but also intensifying market concerns about industry profitability. We believe that since 2025, the core source of incremental reinvestment in the market has been the catch-up and alignment of reinvestment rates from regular to high-end properties, and the current continuous optimization of industry reinvestment leads us to expect stabilizing competition. The sector's overall EV/EBITDA valuation has fallen to less than 9x, and the industry's 5-6% dividend yield will provide good downside support for stock prices. We are optimistic that with the continuation of industry prosperity and the increase in dividend payout ratios for leading operators, the re-entry of long-term overseas funds will drive the sector's revaluation. Duty-Free: Strong recovery in Hainan business, preliminary validation of profit recovery. According to data from Haikou Customs, duty-free sales in Hainan's outlying islands have maintained strong growth since October 2025, with year-on-year growth rates of 18.6% and 25.7% in the fourth quarter of 2025 and the first quarter of 2026, respectively. The profitability of duty-free leading companies has recovered since 2025 and the first quarter of 2026, with operational efficiency improvements, with performance recovery mainly driven by the impressive growth of duty-free business in the outlying islands. Although fluctuations in airport operations have led to slower revenue growth, the impact on profitability is limited, and the optimization of policies for in-city stores is expected to cater to the primary demand from Beijing and Shanghai. Furthermore, the acquisition of DFS's Greater China retail business has been completed, further enhancing international competitiveness. Looking into the medium to long term, the closure of the entire island of Hainan will create significant incremental space for local commercial environment and tourism retail, allowing leading companies to maintain a strong market position and realize long-term profit release under high operating leverage. With recent price declines to new lows, the continued realization of industry prosperity is expected to bring market attention back, suggesting a low allocation at this point. Scenic Spots: Revenue growth rate in the first quarter returned to growth, focusing on holiday policy elasticity. The median revenue growth rate of 17 A-share scenic spot companies was approximately 2% in 2025 and around 7% in the first quarter of 2026, with weak profit performance compared to revenues. As revenue growth accelerates in the first quarter and the peak season gradually approaches in the second and third quarters, industry performance expectations are expected to improve, and there is also the possibility of expanding the scope of autumn holidays this year to increase the market's interest in the off-season tourism market in the fourth quarter. Although there may be pressure on the macro consumption environment, scenic spots as important sites for experiential consumption have strong demand resilience, and the market still relatively undervalues the elasticity of holiday policies, suggesting a focus on opportunities in the scenic spot sector. There are usually fundamental differences between specific scenic spots, and it is recommended to focus on companies with significant marginal changes (such as new business expansion, new project construction, governance optimization, etc.), as such companies are expected to show better growth prospects. Ready-to-Drink Beverages: Select strong ALPHA PRO HLDGS and focus on opportunities to invest in undervalued leading companies. In 2026, with the background of declining consumer demand due to the reduction in takeaway subsidies, the industry is likely to face negative beta in consumer demand, with the market share of leading brands expected to accelerate consolidation. In terms of corporate operations, leading brands are actively expanding product categories and seeking volume increases. From an investment perspective, it is recommended to focus on two main themes: 1) companies with strong alpha characteristics; 2) leading companies with low valuations but deep operational barriers and broad long-term potential, which have investment value under low valuation levels. Catering: Highlighted quality-price experience demand, expansion of scale externally and improvement of efficiency internally. Looking back at 2025, influenced by the macro consumption environment, the average spending per customer in the catering sector has been under pressure, with consumers paying more attention to value for money and demanding higher quality and freshness of ingredients; on the other hand, the demand for dining has gradually shifted from simple satiety to emotion and experience-driven, prompting catering companies to continuously upgrade in product innovation, store scenes, and service models. In 2026, it is recommended to focus on the growth logic of catering companies in expanding external scale (lower-tier markets, overseas, multi-branding) and improving internal efficiency (supply chain construction, operational efficiency, optimization of single-store models), focusing on leading companies with strong momentum in store expansion and solid support for same-store growth and leading companies with steady progress in their main business, providing higher shareholder returns. Human Resources: Growth driven by outsourcing, enhanced by government subsidies. The human resources sector is closely related to the macroeconomic cycle, with the recruitment outlook under the current environment still lagging behind historical peaks, but business outsourcing, online recruitment, and other pathways are in a growth phase. Additionally, we have observed a slight recovery in high-end recruitment business, and government subsidies for the industry are sustainable. In the medium to long term, the human resources industry will develop in a more standardized manner, benefiting the increase in market share for leading companies. Against the backdrop of rapid AI development, the human resources industry is poised to continue improving efficiency and has development potential in commercialized products, but while AI development creates some roles it may also potentially replace others. It is recommended to pay attention to changes in the recruitment industry's business cycle and the impact of AI on the industry, as valuations for companies within the sector are currently at historical lows. Risk factors: Economic slowdown exceeds expectations, consumption downgrading trend exceeds expectations; domestic and foreign travel policies change unexpectedly; unexpected changes in outbound visa application policies; slow recovery of cross-border air capacity; intensified market competition; significant currency fluctuations, etc.