1 China Consumer Sector Sep 27, 2016 Sector Report Rating: Neutral Analyst: Paul Pan Tel: (852) 2147 8829 Email: paulpan@abci.com.hk China Consumer Sector New developments, new winners  There were signs of improvement in the consumer market in China. Accumulated retail sales growth remained at 10.3% YoY while monthly growth climbed to 10.6% YoY in Aug 2016.Online retail sales growth tapered, but high sales growth persisted for non-physical goods  Varying growth momentum was seen across the retail industry; even the ones considered to benefit from consumption upgrade have seen faltering growth  We envision three emerging developments would transform the consumer market in China - moderation, function, and aspiration; we believe WH Group (288 HK) and ANTA (2020 HK) would benefit from these emerging developments  Numerous companies are listed in the HK and A-share markets. Uneven 1H16 results and the wide valuation range reflects the sector’s stiffening competition as well as differences in fundamentals among these players Previous reports China Dairy Sector (Neutral) http://sec.abci.com.hk/medias/ABCI_Dairy_Sector_Neutral.pdf Yili (600887 CH, HOLD, TP: HK$17.61) http://sec.abci.com.hk/medias/ABCI_Yili_600887CH_Hold.pdf Mengniu (2319 HK, HOLD, TP: HK$14.53) http://sec.abci.com.hk/medias/ABCI_Mengniu_2319HK_Hold.pdf Biostime (1112 HK, HOLD, TP: HK$22.83) http://sec.abci.com.hk/medias/ABCI_Biostime_1112HK_Hold.pdf Source(s): ABCI Securities Sector performance (%) Absolute Relative* Hang Seng Consumer Goods Index 1-month 1.39 (1.94) 3-month 13.47 (4.33) 6-month 12.49 (6.91) YTD (0.14) (11.52) Hang Seng Services Index 1-month 4.97 1.64 3-month 15.61 (2.19) 6-month 8.40 (11.00) YTD 8.31 (3.07) * Relative to HSI Index Source(s): Bloomberg, ABCI Securities Sector 1-yr performance Source(s): Bloomberg, ABCI SecuritiesRetail sales growth picked up in Aug. Retail sales growth improved to 10.6% YoY in Aug 2016 from 10.2% YoY in July, but the accumulated retail sales growth remained at 10.3% YoY in Aug 2016 compared to the 10.7% observed in 2015. Nonetheless, a few bright spots exist. Online retail sales growth slowed, but there are signs of recovery. Growth in total online retail sales and the online retail sales of physical goods declined, yet growth momentum of online sales of services remained strong. We believe consumers may have held back their purchases in anticipation of the major sales over the next few months. Also, service consumption demand is playing an increasingly important role in supporting online retail. Performance of the consumer sub-sectors varies. Growth in some industries such as “Sports & Recreation” and “Furniture” trended down, reflecting a weakening consumer sentiment. However, a few sub-sectors, such as “Automobile” and “Building & Decoration materials”, remained strong. Three emerging developments. We envision three emerging developments to transform the consumer market in China. 1) the moderation of consumption that go beyond savings - disruptions originated from the industry and consumer levels also play a role; 2) the Chinese consumers are bargain hunting, but more emphasis has been placed on the function or the quality of products; 3) the aspiration for lifestyle upgrade means Chinese consumers are willing to spend more to enhance their quality of life, either materially or psychologically. We believe WH Group (288HK) and Anta (2020 HK) would benefit from these developments. Valuation of consumer sector reflects the reality. Valuation of the consumer sector reflects a mixed picture. As of Sep 27, 2016, the A-share winners (i.e. positive growth in YTD share price) in the consumer sector have a P/E range of 7.49x – 41.74x, a median of 15.24x and an average of 17.08x; HK-listed winners in the consumer sector has a P/E range of 6.88x – 76.16x, a median of 17.80x, and an average of 20.38x. The Hang Sang Consumer Goods Index and Hang Sang Consumer Services Index also saw relative (against HSI) YTD decline of 11.52% and 3.07% and 6-mth decline of 6.91% and 11.0%. Our sector rating is Neutral. Sector rating & valuation Company Ticker Rating Pricing currency Price Market cap TP P/E(x) P/B (x) ROAA (%) ROAE (%) (mn) FY16E FY17E FY16E FY17E FY15A FY16E FY17E FY15A FY16E FY17E WH Group 288 HK BUY HKD 6.37 93,310 7.68 14.94 13.53 2.38 2.25 5.42 6.54 6.70 14.43 16.37 17.07 Anta 2020 HK HOLD HKD 21.10 52,783 23.43 26.53 23.98 6.34 5.85 17.09 16.73 17.11 24.92 24.78 25.38 Yili 600887 CH HOLD RMB 16.11 97,704 17.61 21.24 18.01 4.66 4.52 11.71 12.24 13.76 23.77 23.25 23.77 Mengniu 2319 HK HOLD HKD 14.60 57,265 14.53 24.13 25.57 2.09 1.98 4.84 3.85 3.43 10.85 8.89 7.93 Biostime 1112 HK HOLD HKD 21.15 13,333 22.83 23.53 19.57 2.87 2.41 2.46 3.14 3.86 7.71 11.23 11.48 Source(s): Bloomberg, ABCI Securities estimates *