1H17 results wrap-up and 2H17/2018 outlook

Deutsche Bank Markets Research Asia China Consumer Industry Greater China Consumer Date 4 September 2017 Industry Update 1H17 results wrap-up and 2H17/2018 outlook Top Buys: Eclat, Feng Tay, Moutai, Dali and Samsonite ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Anne Ling Research Analyst (+852 ) 2203 6177 anne.ling@db.com Mark Yuan Research Analyst (+852 ) 2203 6181 mark.yuan@db.com John Chou Research Analyst (+852) 2203 6196 john.chou@db.com Top picks Eclat Textile (1476.TW),TWD376.00 Buy Feng Tay (9910.TW),TWD142.00 Buy Kweichow Moutai (600519.SS),CNY495.20 Buy Dali Foods (3799.HK),HKD5.19 Buy Samsonite International S.A (1910.HK),HKD32.55 Buy Source: Deutsche Bank 1H17’s results show that the market is trending better, with key themes, such as premiumization, health and leisure, and the wealth effect, playing an important role in sales growth. Corporates are also active in improving their business structures via a leaner supply chain or integration, especially those facing higher raw material costs. Into 2H17/2018, we believe kids/family and a rise in consumer credit will be additional themes. We like Eclat/Feng Tay (Nike supply chain theme), Moutai (strong demand + restocking), Dali (success in new products) and Samsonite (synergy and integration benefit from Tumi). Retaining Sell on Tingyi (new products yet to make an impact, given its size). 13 companies beat DB/market estimates & nine missed; Hengan/H&H upgraded Of the 40 companies under our coverage that announced 2Q or 1H17 results, 13 beat DB/market estimates and nine missed. Post results, we upgraded our recommendations on two companies (Hengan and H&H). Overall, we believe 2Q wasn’t a bad quarter – for both staples and discretionaries. SSS for traditional channels/brands continue to recover with a better trend in 2Q. Sportswear (incl supply chain), white wine and white goods – strongest growth Overall, three quarters of the companies experienced yoy EBIT growth due to: 1) market recovery (less discounting/less inventory), 2) cost-saving in opex (offsetting GPM decline), and 3) a low base in 1H16. While we always say there is limited top line growth, ~half of the companies saw 10%+ sales growth in 1H17 due to: 1) acquisitions (e.g. white goods, Samsonite), 2) an extremely low base (Tingyi and H&H), and 3) companies in the right space (sportswear and its supply chain, white goods, and white wine). Structural trends but corporates need the right strategy Consumption upgrade/premiumization, the embracing of casualization and lifestyle experience, and the kids and family theme are the key macro trends, but we believe only corporates with visionary management will benefit from such trends, e.g. Yili and Mengniu’s focus on the health-related space, Shenzhou’s investment in Vietnam and automation in China, Anta’s multi-brand strategy and Samsonite’s strategic acquisition of Tumi. Leaner supply chain is the buzz theme In relation to operations, a variety of business reorganizations have been announced by companies. There is no one-size-fits-all model and each is mapping its model based on its own SWOT. But the common themes are a leaner supply chain, de-layering and speed to market. Companies with strong balance sheets are also more active in balance sheet management. Valuation and risks We use DCF and P/E-to-growth as tools to value the sector. DCF captures the future cash flow of consumer companies, while PE/G and relative P/E show a company’s value relative to its peers. Downside risks: SSSg failing to pick up; channel inventory piling up; intense competition; product misses. Upside risks: a greater-than-expected rise in SSSg; higher operating leverage; weaker-than-expected input costs. Distributed on: 03/09/2017 19:18:26 GMT0bed7b6cf11c 4 September 2017 Consumer Greater China Consumer Page 2 Deutsche Bank AG/Hong Kong 1H17 results In general, better EBIT and sales growth for most players Overall, three quarters of the companies under our coverage experienced yoy EBIT growth due to: 1) market recovery (less discounting/less inventory), 2) cost-saving in opex (offsetting GPM decline), and 3) a low base in 1H16. While we always say there is limited top line growth, in fa