CITIC Securities: Improvements in supply and demand in the service industry consumption, leading companies outperforming. Three main themes recommended for the second half of the year.

CITIC SEC released a research report stating that the annual report for 2025 and the quarterly report for Q1 2026 show that the service industry consumption presents characteristics of supply and demand improvement and leading enterprises' excess returns. Looking ahead, the bank believes that the social service industry configuration has three short-term clues: policy leading, price improvement, and baseline segmentation, as well as three long-term supports: penetration enhancement, concentration of leading companies, and innovative supply. In the second half of the year, the report recommends three main lines of investment: 1) in the leisure travel scene, short-term benefits from holiday policies, long-term benefits from hotels and scenic spots with excellent operational capabilities in the sector of tourism and travel consumption enhancement; 2) in the sustained demand scene, high elasticity and clear pattern derived from future stable dividend expectations of gaming companies and leading brands in the ready-to-drink beverage sector; 3) in the cyclical leisure sector, steady-operating and growth-oriented catering and duty-free leading companies. In addition, attention should be given to OTA, human resources, and exhibition sectors. The main points of CITIC SEC are as follows: Review of Q4 2025 & Q1 2026: Resilient demand, leading enterprises build barriers Pan-travel chain: Gaming is highly promising, hotels and duty-free shops are at turning points, and there is performance differentiation in the scenic area sector. Macao's gaming revenue in Q1 2026 increased by 14.2% year-on-year, maintaining high prosperity. The growth is driven by the high-end segment while demand in the mid-range segment remains stable. Both sides of the hotel supply and demand have improved synchronously since Q4 2025, with the industry's supply currently slowing to 6.8%, and the leading RevPAR returning to low single-digit growth. Sales in Hainan's offshore duty-free shops turned positive year-on-year from September 2025, increased by 25.7% in Q1 2026, preliminarily verifying profit recovery for leading companies. In Q1 2026, the median revenue growth of 17 listed scenic area companies was 7%, and the median profit growth was 1%. The flow of tourists to famous mountains and rivers remained stable, while artificial scenic areas faced pressure in operations. The leading OTA continued to capture market share but faced intense regulatory oversight. Food and beverage: Subsidy reduction tests the current store status, and structural adjustments push up demand for the catering enterprises. As of March 2026, there were 506,000 milk tea shops in China, with nearly 15,000 closed from the peak supply in September 2025; there were 211,000 coffee shops, experiencing moderate growth in supply. The intense competition in the food delivery market eased as subsidy levels decreased, leading to periodic headwinds for the ready-to-drink beverage industry. Due to factors such as alcohol bans, the growth of the dining and beverage industry slowed down to 0.9% in June 2025 but fluctuated back up to 4.8% in January-February 2026, then dropped to 2.9% and 2.2% in March and April. The dining and beverage sector has experienced oscillations and is gradually recovering. Human resources: Recruitment demands closely linked to macroeconomic conditions, driving growth in outsourced business operations. The urban unemployment rate was 5.3% in January-April 2026, an increase of 0.1 percentage points year-on-year. According to Datayes, several online recruitment platforms showed that the new job postings in January-April 2026 increased by 49.6%, -45.7%, -1.4%, and -9.3% respectively year-on-year. The late Chinese New Year in 2026 extended the off-peak hiring season before the holiday, although there was still pressure on year-on-year performance after the holiday. The current recruitment scene still lags behind historical peak levels, but sectors such as business outsourcing and online recruitment are in a growth period, with mid- to high-end recruitment experiencing some recovery. Investment outlook for H2 2026: Policy, price, and benchmark, focusing on three clues Policy leading: Opening up travel demand with holidays, guiding regulation for positive development. 1) The optimization of holiday systems is continuously opening up consumer scenarios for tourism and pan-travel consumption. It is expected that the implementation of spring and autumn holidays and paid annual leave in various regions will drive an increase of nearly 1% in annual tourism revenue. Unexpected international oil price increases may offset the travel demand increase brought about by additional holidays this year, but it will not change the long-term trend of robust tourism demand. 2) Recent regulatory measures targeting OTA platforms have shifted from simple anti-monopoly actions to a new stage focusing more on transparent rules, fair competition, and data governance. Short-term adjustments may lead to downward revisions in profit forecasts for leading companies. Price improvement: Clear path for leading enterprises to increase prices, clear structure of K-shaped recovery. 1) Inflation is pushing up prices: Historically, the impact of rising raw material prices on the gross profit margins of leading catering companies has followed a path of "short-term pressure - medium-term recovery - long-term increase." 2) Quality-driven pricing: In the hotel industry, as supply growth slows down and industry competition becomes more rational, the increase in the proportion of mid- and high-end products and the pricing strategy for new and old stores have driven ADR growth, making ADR a core driver of the current uptrend with a year-on-year increase of 5.4% in Q1 2026. 3) Recovery in high-end consumption: Wealth effects first manifest in high-end consumption, with per capita spending in duty-free stores in Hainan maintaining year-on-year growth since December 2024, reaching 29.5% in Q4 2025 and continuing to increase by 5.9% in January-April 2026. Benchmark segmentation: Different pressures in segmented sectors, cautious mood leads to excessive pricing. Different industries have experienced varying impacts from baseline factors: after May 2025, the catering industry's consumption was significantly affected by alcohol bans, and the operating baselines of food companies were generally lower in 2025. The ready-to-drink beverage and gaming industries may be disturbed by high baseline figures, showing sensitivity to fluctuations in high-frequency data like same-store sales and GGR. The bank believes that high baseline figures mainly affect short-term year-on-year performance, while demand resilience, supply changes, and operational quality are the core variables that need to be priced. Long-term investment focus: Disturbances do not change trends, leading enterprises continue deepening their efforts Learning from others: Looking at the Japanese and Korean markets, the trend of increasing the proportion of service consumption is clear. The proportion of service consumption in Japanese households has increased from around 53% in 1980 to about 59% in 2025, while in Korea, it has increased from 42% to 61%. Both countries have seen core stages of service consumption expansion concentrated in the period of consumption upgrade after rapid economic growth. The experiences of Japan and Korea indicate that there is long-term growth potential in areas such as tourism, culture and entertainment, sports and health, medical care, and elderly care. Concentration of leading companies: Industry penetration combined with leadership, clear and stable structure with dividend payout expectations. Looking ahead, the subsectors of the social service industry still have great potential for penetration and concentration increase in the long term. In 2023, the HR service market revenues in the United States and Japan were 166 billion and 74 billion respectively, while China's market was only 22 billion. In 2023, the average annual consumption of ready-to-drink beverages per capita in China was 22 cups, presenting a significant opportunity for improvement compared to the average of 267 cups in developed countries. The rate of hotel room chaining in China is around 40%, with a near doubling opportunity compared to the chain rate of over 70% in the United States. The clearer advantages of leading enterprises and industry structure have brought stable capital return expectations, with leading gaming, hotel, catering, and HR companies having a capital return rate (through buybacks and dividends) of around 5%, providing strong support for their stock prices. The evolution of Chinas service consumption is expected to continue towards the stage of "penetration increase, leader concentration, and high shareholder return." Innovative supply: Scenario and AI triggering a wave of supply, exploring overseas incremental opportunities. 1) Innovation advantages: Leading companies with technological accumulation, data barriers, and supply chain capabilities are expected to outperform. The gaming industry has improved its profit margins by introducing innovative gaming tables and baccarat side-bet gameplay, with such innovations becoming an important driver of GGR growth. AI has been deeply applied in the HR industry in resume screening, job matching, AI interviews, intelligent invitations, and automated recruitment processes, as well as in the OTA industry for content generation, demand understanding, itinerary planning, dynamic customer service, and supply chain operations along the entire chain. 2) Overseas expansion: The OTA and ready-to-drink beverage sectors are showing different patterns of differentiated expansion. The ready-to-drink beverage sector is accelerating its expansion overseas, initially focusing on mature Southeast Asian markets where competition is fierce, and gradually exploring the high consumption potential in Europe and the United States. The market landscape is still evolving, as it is still in the early stages of development. Investment Strategy The annual report for 2025 and the quarterly report for Q1 2026 show that service industry consumption presents characteristics of supply and demand improvement and capital return excess for leading enterprises. Looking ahead, the bank believes that the social service industry configuration has three short-term clues: policy leading, price improvements, and benchmark segmentation, as well as three long-term support factors: penetration enhancement, concentration of leading companies, and innovative supply. Looking ahead to the second half of the year, based on comprehensive business sentiment and segmented resilience, the report recommends focusing on: 1) leading hotel companies benefiting from both sides of supply and demand improvement; 2) the continued prosperity and dividend enhancement of Macao's gaming industry; 3) leading companies in the ready-to-drink beverage sector with excellent operational capabilities amid increasing concentration; 4) duty-free shops expected to benefit from holiday policies and operational changes; 5) scenic areas experiencing marginal changes in operations despite the recovery in business sentiment; 6) catering companies experiencing the realization of quality and scale efficiencies; and 7) OTA companies and human resources sectors experiencing marginal changes under the influence of regulatory measures and macroeconomic demand. Risk Factors: - Downward trend in macroeconomic growth and slower-than-expected consumption recovery - Unexpected changes in domestic and foreign travel policies - Slow recovery in cross-border aviation capacity - Drastic increase in oil prices - Significant fluctuations in exchange rates - Inadequate growth in passenger flows - Food safety issues - Slower-than-expected expansion of store networks - Intensified market competition - Slower-than-expected recovery in recruitment demand