Huachuang Securities: The valuation of leading food and beverage companies is at the bottom and they have the benefit of long-term growth options.

Huachuang Securities released a research report stating that the valuation percentile of leading companies in the food and beverage industry is currently at a historically low level, and the free cash flow return ratio is also at a historical high. From a medium to long-term perspective, the core competitiveness of excellent companies has not changed, but has been strengthened in adversity, and still has long-term growth potential. Sustainable free cash flow and continuous dividends serve as the foundation, transitioning from growth pricing to certainty pricing. Free cash flow is a prerequisite for continuous dividends, which helps drive the valuation recovery of high-quality leading companies. From a certainty perspective, investors can receive dividend returns and also enjoy growth options. From the current dividend yield perspective, Yili (600887.SS) and Wuliangye Yibin (000858.SZ) are recommended, with focus on Shuanghui (000895.SZ). Huachuang Securities' main points are as follows: What is the underlying logic behind high dividends? Building on the December report "Pricing Paradigm of Low-speed Era - Insights on Global Consumption Leading Dividend Yields and Repurchases," further research is done from the perspective of free cash flow to delve deeper into the underlying logic behind high dividend styles. The macro environment has shifted from leveraged expansion to high-quality development, and consumer goods have transitioned from incremental to static or even shrinking, with leading enterprises gradually entering a low-speed growth era, inevitably leading to changes in the pricing paradigmfrom growth pricing to certainty pricing, with the core focus being sustainable free cash flow and dividends based on it. Business models in the low-speed era: Diminishing expansion, moving towards free cash flow. In the past, the economy was driven by scale, with entities inclined towards leveraged expansion, increased capital spending, and pursuit of income scale, even tolerating short-term losses. However, with the transition to efficiency-driven static economy, companies are more inclined to reduce unnecessary capital spending and focus on stable cash flow allocation and real profit growth. In this macro context, the domestic consumer goods industry has experienced two growth dividends driven by "quantity" (increasing quantity) and "quality" (improving quality), with growth rates in recent years decreasing, and even entering a no-growth or negative growth phase. Moreover, as leading enterprises grow in scale, the previous strategy of pursuing high growth and rapid expansion has evolved into a focus on sustainable business operations (ROE, free cash flow) and high-quality development that benefits shareholders. Strengthening the advantage of free cash flow in the food and beverage sector. Benefiting from strong bargaining power with upstream and downstream partners and high operational efficiency, the food and beverage sector has a strong ability to generate free cash flow. Even in terms of absolute size proportion, the proportion of free cash flow in the food and beverage sector has increased from 1.4% to 10.5% over the past decade, ranking fourth. Baijiu: Improving cash flow quality for top liquor brands, with significantly reduced volatility. Horizontally, Baijiu's excellent business model creates a strong cash flow, outperforming the entire consumer industry; vertically, changes in Operating Working Capital (OWC) for liquor companies are often leading indicators of industry cycle changes, with a shift from positive to negative signaling the end of industry bottoms (such as in 2009 and 2016), while expansion signals pressure transmission (such as in 2012-2015). Currently, OWC is slightly increasing, indicating continued industry pressure, but top liquor brands have improved cash flow quality, with reduced volatility and increased risk resistance. Mass products: From revenue-centric to profit-centric, then to cash-centric. In the growth phase, companies were focused on gaining market share with low profits and high capital expenditure (CAPEX), while in the static phase, companies shifted towards boosting profits and eventually reducing CAPEX or proactively downsizing production capacity, ultimately focusing on generating free cash flow. Industries like dairy and meat, soft drinks, beer, and snacks have all shifted from focusing on revenue to focusing on profits, and it is projected that more companies will now focus on cash in their evaluation metrics. Transition of pricing paradigm: The core of dividends lies in sustainable free cash flow and dividend policies, urging for increased dividends in the new normal to maximize shareholder value. Corresponding to the shift in operating models is a change in pricing paradigms, where high-growth periods see PEG greater than 1 and a focus on growth pricing, while in low-growth periods, the dividend discount model is used for certainty pricing, emphasizing sustainable free cash flow (a prerequisite for dividends) and good corporate governance (dividend policies). Most leading food and beverage companies possess the ability to sustain cash flow, with the majority of them currently experiencing historically high cash returns ratios. In terms of dividend willingness, dividend rates have been continuously increasing since 2015, with improvements in state-owned enterprises' governance and support for local economies and fiscal demands, as well as private enterprises implementing equity incentives and emphasizing dividends in a market-oriented mechanism. Furthermore, there is a call for more companies to be more cautious in expanding ineffective production capacity, focus on sound management, establish long-term dividend or repurchase mechanisms, and maximize shareholder value in the new normal. Risk factors: Slowdown in the macroeconomy; policy risks; slower-than-expected recovery in end-demand; intensified industry competition; downward shift in sector valuations.