China Consumer Sector – A strong comeback in 5-1 golden week

CMB International Global Markets | Equity Research | Sector Update PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE MORE REPORTS FROM BLOOMBERG: RESP CMBR <GO> OR http://www.cmbi.com.hk China Consumer Discretionary Sector Walter Woo (852) 3761 8776 walterwoo@cmbi.com.hk Yum China (9987 HK) share price Source: Bloomberg, CMBIGM estimates XBXB (520 HK) share price Source: Bloomberg, CMBIGM estimates Xtep (1368 HK) share price Source: Bloomberg, CMBIGM estimates Topsports (6110 HK) share price Source: Bloomberg, CMBIGM estimates 200.0250.0300.0350.0400.0450.0500.0550.0May-22Aug-22Nov-22Feb-23Stock HSI(HK$)1.03.05.07.09.011.0May-22Aug-22Nov-22Feb-23Stock HSI(HK$)6.08.010.012.014.016.0May-22Aug-22Nov-22Feb-23Stock HSI(HK$)3.04.05.06.07.08.09.0May-22Aug-22Nov-22Feb-23Stock HSI(HK$)OUTPERFORM (Maintain) 8 May 2023 1  Impressive recovery vs Feb-Apr 2023, while both consumer and investors sentiment should be boosted, the post holidays purchasing power is still important. We find the data points during this 5-1 golden week in 2023 slightly better than expectation and encouraging, esp. after the weakening consumption trend post CNY 2023. 1) We are highly delighted to see a surge in recovery rate of domestic tourism volume/ spending during this holiday to 119%/ 101%, which is far better than the 83%/ 51% in Qingming Festival and 89%/ 73% in CNY, according to Ministry of Culture and Tourism/文化和旅游部. 2) The spending power also continued to improve, where spending per tourists jumped by 32% in 5-1 golden week, much faster than the 10%/ 6% during Qingming festival/ CNY. Moreover, ticket size for movie actually increased by 18% YoY, while that was only flattish during the CNY 2023. 3) Tier 1 cities are clearly outperforming, where retail sales (based on various official sources) had increased by 21%/ 65%/ 33% in Beijing/ Guangzhou/ Shenzhen, compared to the nation-wide growth of 19%, most likely due to low base. Hence, companies with greater sales mix in these areas should benefit more. 4) While domestic travelling has roughly surpassed the pre covid-19 level (270mn passenger journeys reached 270mn in this 5-1 holidays and reached 101% of the level in 2019, much better than 54% during CNY 2023, according to Ministry of transport/交通运输部), the outbound travel only recovered to about 40% of the 2019 level (based on international air flights volume), while the recovery rate of visitors to HK/ Macau were better at 60%/ 70% (vs 2018/ 2019 level). On one hand, we believe these constructive fundamentals (retail sales accelerated from 5.8% in 1Q23 to 18.9% in 5-1 golden week, gradual recovery in domestic and international interactions) would lead to better income and corporate earnings growth, as well as consumer and investors sentiment. On the other hand, we would still stay highly cautious about the purchasing power post 5-1 golden week, as the purchasing power can still be dragged by potentially weak property market and geo-political tensions.  Tourism (including hotels), catering, sportswear continued to outperform, while apparel and home appliances slightly underperformed. According to the VAT invoice data by State Administration of Taxation/国家税务总局增 值税发票数据, the consumption related sales, during 5-1 golden week, grew by 24.4% YoY, while service consumption outpaced commodity consumption (at 28.7% vs 19.5%). By sector, sales growth for tourism related/ hotels/ sports service/ catering/ in-door entertainment/ apparel were 320%/ 52%/ 34%/ 33%/ 24%/ 15%. Also, based on data from Ministry of Commerce/商务部, retail sales increased by 18.9% YoY during 5-1 golden week, while that for key catering enterprises/ jewelry/ autos/ communication devices/ apparel/ cosmetic/ cigar & liquors/ home appliance were 58%/ 23%/ 21%/ 20%/ 18%/ 17%/ 15%/ 14%. We prefer sectors like catering/ sportswear/ tourism and hotels/ apparel, more than home appliances. China Consumer Sector A strong comeback in 5-1 golden week 8 May 2023 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE  Catering sector (outperform). Without doubts, catering sales growth is leading many other industries. Also, the average SSSG (CMBI est. for major listed catering brands) is also accelerating, from just 6%/ -2% in Jan/ Feb to around 24% in Mar and now 38% in 5-1 holidays. But the key, in our view, is the recovery rate vs 2019 (CMBI est.), which was declining from 95%+ in Jan to 80%+ / 75%+ in Feb/ Mar 2023, and it has finally improved to 85%+ in 5-1 golden week, which is highly encouraging. On the margin side, we do believe the costs inflation would not return as fast as the sales growth, hence operating leverage can still be meaningful in FY23E, evidenced by the YUMC 1Q23 result l