Research published by Blue Lotus Research on March 17, 2023

 

(27 Pages, 43 graphs and tables)

Listen to analyst’s audio summary Even though we are long-term optimistic on the rise of Chinese consumer brands, we believe short-term optimism is misplaced. Chinese underconsumption is only half true. It only occurs in categories associated with development stages; We suggest investors to focus on two themes: (1) structural changes led by China’s transition to an older and more affluent society, (2) substitution and globalization that can break the ceiling for valuation; Our TOP PICKS are Li Auto, Atour, Luckin, FUTU, BEKE and Miniso.   Chinese underconsumption is a myth China’s personal consumption over GDP isn’t low by global standards if we compare apple to apple. The underconsumption only holds true in sectors serving an older and richer population, which are small today but will grow into in due course. China’s consumption levels in most main-stay category/sectors aren’t low.   Theme No.1 is thus to invest in these new sectors An obvious winner is FUTU, taking advantage of rising affluence and global asset allocation, and KE Holdings, benefiting from rising liquidity of residential properties. But Miniso also signifies the export of Chinese lifestyle elsewhere.   Theme No.2…who substituting who makes all the differences A salient fact about Consumer is that its businesses employ very different physical, chemical or biological processes and serves mutually exclusive populations. Cross sector entry is difficult and market ceiling is a winner’s curse. Substituting multinational corporations (MNC) is an inevitable step for growing and presages global competitiveness. We argue that technology advancement, import revitalization, concentrated segmentation are three ways employed following successful domestic substitution (国产替代) to brings local champions one step up into greater success. We suggest investors to look for these upgrade cases.   No easy routes but focus the right segments lessens the difficulty Out-spend MNC’s entire budget isn’t feasible. But focusing on the right segments and making smart decisions on R&D and/or marketing can achieved the goal. We believe such is also the only way to identify true winners in Consumer.

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