China Consumer Sector:New developments,new winners

SecuritiesRetail sales growth picked up in Aug. Retail sales growth improved to 10.6% YoY inAug 2016 from10.2% YoY in July, but the accumulated retail sales growth remained at10.3% YoY in Aug 2016compared 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 salesand the online retail sales of physical goods declined, yet growth momentum of online sales of services remained strong. We believe consumersmayhave 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 ofthe consumer sub-sectors varies.Growth in someindustries such as “Sports & Recreation” and “Furniture” trended down, reflecting a weakening consumer sentiment.However, afew sub-sectors, such as “Automobile” and “Building & Decoration materials”, remained strong.

Three emerging developments.We envision three emergingdevelopments to transform the consumer market in China. 1) the moderation of consumption that go beyond savings-disruptions originatedfrom the industry andconsumer levels also play a role; 2) the Chinese consumersare bargain hunting, but more emphasis has been placed on the function or the quality of products; 3) theaspiration for lifestyle upgrade means Chinese consumersare willing to spend moretoenhancetheir 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 theconsumer sector reflectsa 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-listedwinners 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 ratingis Neutral.