Functional Consumption Still Resilient
New consumer psychology has emerged, how to choose consumer stocks in the current market?
The author believes that it is essential to return to the most fundamental functionality.
Companies that can conveniently and quickly meet people's basic needs through a wide network of outlets and provide good returns to shareholders are good choices.
They did not enjoy valuation premiums during the last round of consumer bubbles.
Soros views the development of financial markets as a historical process, which the author agrees with.
Over the past decade, the author has also witnessed many historical events reflected in the financial markets.
Among them, the upgrade in consumption has led to a warm pursuit by capital, even to the point of frenzy and conceptualization, popularizing the notion that "consumption is an everlasting golden track" and "the consumer industry is a friend of time."
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At the beginning of 2021, Haidilao's price-to-earnings ratio exceeded 100 times, becoming a historical mark of extreme DCF (Discounted Cash Flow) valuation.
In recent years, consumer stocks have become one of the sectors with poor market performance.
It turns out that consumer stocks also have cycles.
At the end of 2023, the author warned in "Entering the Fourth Consumer Era: A Look at Consumer Stock Investment" (published in the 95th issue of the 2023 Securities Market Weekly) that some consumer stocks will face challenges in the future.
Products that have been continuously raising prices under the guise of consumption upgrades, and the prices of some so-called well-known brands will move down towards white-label products.
The industry's ceiling is shrinking, and for some companies, there is a risk of killing performance, valuation, and logic.
Most baijiu brands, especially third and fourth-tier brands, will face the possibility of dividend rate pricing.
Some companies have taken the lead in setting an example: the dividend rate of Yangyuan Beverages in A-shares is 9%, and the dividend rate of Master Kong in H-shares is 5.7%.
Many brands that are neither fish nor fowl may experience a long-term market contraction, even high-end consumption will decline significantly.
A cup of coffee priced at 8.8 yuan may not be able to increase in price in the medium to long term, which is completely different from the resonant logic of the past where food and beverage stocks rose in both volume and price.
As time comes to the mid-report season of 2024, let's examine the performance of many consumer stocks.
Luxury goods cannot rise forever, starting with high-end consumption.
There was once a saying in the secondary market, "Luxury goods are more resistant to macroeconomics," which has been proven to be completely unreliable in 2024.
The LVMH Group's sales revenue in the first half of the year decreased by 1% year-on-year to 41.7 billion euros, and net profit decreased by 14% year-on-year to 7.267 billion euros.
Not only did it fall below expectations, but the second quarter also showed a further slowdown, with growth less than half of the first quarter's 3%.
In fact, over the past year, the performance increase of the LVMH Group has already shown a slowdown.
In 2023, the LVMH Group's revenue set an annual record, but the annual revenue growth slowed to 8.8%, less than half of the growth rate in 2022.
The slowdown in growth is particularly prominent in the Asian market.
According to financial report data, in the first half of 2024, the LVMH Group's sales revenue in the Asian market led by China (excluding Japan) decreased by 10% year-on-year; in the second quarter, sales revenue in the region fell by 14%, underperforming expectations.
It's not just the LVMH Group that is facing this issue; Swatch, a luxury watch manufacturer in Switzerland, also saw a 70% decline in net profit in the first half of the year, mentioning in its financial report that the decline in luxury goods demand in the Chinese market affected its performance.
According to the first-quarter data released by the Swiss Richemont Group, sales revenue slightly increased by 1%, and its sales in the Greater China region decreased by 27%.
Hugo Boss in Germany has also revised its sales and profit guidance for 2024 due to weak consumer demand in China and other parts of the world.
From 2021 to 2023, Estée Lauder's net sales in the Chinese mainland accounted for about 36%, 34%, and 28% respectively, with the performance in the China region declining year by year.
It is evident that the Chinese market has a significant impact on the performance of luxury groups, representing more than half of the global luxury goods consumers.
Over the past years, the core reason for the price increase in luxury goods is actually attributed to the loose policies in the European and American markets and the irrational consumerism environment in China.
When the macro environment changes, or even when it is affected by the "abnormal" environment before, the "demon effect" of price increases quickly emerges.
The luxury goods industry has a short history of 40 years, and the "forever price increase" has almost covered the entire history of the industry.
Now, such a "belief" obviously faces challenges.
Discretionary consumption fades away, and the catering industry is also fading away from the glitz.
Whether it's Michelin or Black Pearl, they are all ignored; people eat where it's cheap and delicious.
According to the big data of Hongcan, as of May 10, 2023, there were more than 2,700 high-end catering stores with a per capita customer unit price of more than 500 yuan in operation in Shanghai.
As of April 19, 2024, the number has decreased by more than 900.
Not only in Shanghai, but also in Beijing, high-end Michelin restaurants are facing the same difficulties.
"Tai Er Pickled Cabbage Fish customer unit price fell to the level of 7 years ago" recently topped the hot search, and its customer unit price of 69 yuan is the same as in 2017.
A survey by iMedia Consulting showed that more than 40% of Chinese consumers have a budget of less than 20 yuan for Chinese fast food, and 85% of people can accept a price of no more than 30 yuan.
Before this, McDonald's "1+1 Mix and Match" and KFC's "Crazy Thursday" and other meal combinations were also very popular with consumers.
Faced with the weak performance of McDonald's China in the first half of the year, executives frankly stated in the conference call: "We found that consumers are very fond of looking for discounts, and we also see a lot of consumer conversion behavior, all based on the most favorable transactions as the standard."
Faced with the wave of price reduction, if you can't beat them, join them.
As the founder of Xiabu Xiabu, He Guangqi, mentioned in an interview, "The entire catering market is reducing prices, and we have to adjust too.
In this market, if you don't grab it, you will only starve to death."
Reflected in the performance of listed companies, Jiu Mao Jiu issued a mid-term performance profit warning for 2024, with a profit decline of 70%, an important reason being that consumers are affected by environmental changes, and the per capita consumption and turnover rate of customers have declined, leading to a decline in restaurant single-store revenue; at the same time, the reduction in restaurant opening and operation costs is lagging behind the decline in single-point revenue, resulting in negative operating leverage.
Xiabu Xiabu issued an announcement expecting a loss of about 270 million yuan in the first half of 2024, mainly due to the overall market environment of consumption pressure and fierce competition in the catering industry leading to low customer traffic to stores.
Xiabu Xiabu also adjusted prices in May, and most meal combinations have been reduced to the 50 yuan price range, while the customer unit price shown in the 2023 report is 62.2 yuan.
Naixue's Tea is expected to have a revenue of about 2.4-2.7 billion yuan in the first half of 2024, and the adjusted net loss is expected to be about 420-490 million yuan.
The announcement of Wei Qian (China) shows that the loss in the first half of the year does not exceed 20 million yuan.
The author has mentioned in "Haidilao Returns to the Starting Point" (published in the 87th issue of the 2021 Securities Market Weekly) and "Haidilao is Expected to Turn a Profit" (published in the 19th issue of the 2022 Securities Market Weekly): "For investment, even if the reform is effective and the company can restore its performance to the level of 2019, compared to the current price, the price-to-earnings ratio reaches 29 times.
After these major changes, can Haidilao still support a high valuation?
This is also a question that the capital market needs to calmly and think about next."
Looking at Haidilao today, the company's performance has more than doubled that of 2019, but the price-to-earnings (TTM) valuation has moved down to 14 times.
It can be seen that performance is certain, but valuation is not certain.
In front of market value, the elasticity of valuation is far greater than the elasticity of performance; and the elasticity of valuation comes from the macro environment + industry prosperity.
Against the backdrop of slowing economic growth, new consumer psychology will naturally emerge.
Functional consumption still has resilience.
The letter to shareholders in Midea Group's 2023 report is written like this: The end of an era will also be the beginning of another era, every rise and fall of the industry, every economic crisis, successful companies are always a minority, the process of this rise and fall is the process of the alternation of new and old enterprises.
So, how to choose consumer stocks in the current market?
The author believes that it is essential to return to the most basic functionality.
For example, in catering, how to conveniently and quickly meet people's needs for salt, sugar, fat, caffeine, and protein through a wide network of outlets, and this point is best done by Yum China's localization.
Yum China currently has relatively little room for price reduction, although the same store still has pressure, but the pressure is much less than other peers in the catering industry.
The reason is that Yum has achieved the ultimate cost-performance ratio, backed by a strong supply chain, and a cup of coffee as low as 9.9 yuan can still have a healthy profit margin.
Yum China's core profit growth in the second quarter of 2024 is 12%, and earnings per share growth is 19%.
The repurchase is obvious in the growth of earnings per share.
In 2024, the funds used by Yum to reward shareholders will reach 1.5 billion US dollars, with a 10% shareholder return compared to the current price.
Uni-President, Master Kong, and Nongfu Spring's instant noodles or beverages can quickly meet people's carbohydrate needs.
Convenience is the core competitiveness of the food and beverage industry, but not all companies can achieve it.
Uni-President's net profit attributable to the mother company in the second quarter of 2024 is 510 million yuan, a year-on-year increase of 31%, and the dividend has exceeded 100% in recent years, and the stock price in 2024 is still rising.
Nongfu Spring is returning to value due to the previous overvaluation.
Coincidentally, in 2009, the price-to-earnings ratio of Master Kong was 40 times, and now it is only 15 times.
However, looking from the perspective of 2009, Master Kong's revenue and profit growth were strong, and it continued to grow in the following three years.
Even looking at Master Kong today, it is better than most consumer companies.
This further illustrates a truth: if you buy it expensive, everything is useless.
Holding Master Kong at 40 times the price-to-earnings ratio in 2009 is the same mistake as Buffett not selling Coca-Cola at 50 times the price-to-earnings ratio in 1998.
However, ten years ago, Master Kong, Uni-President, and Want Want were all investment targets that the author did not look good on.
In 2015, the author wrote "Want Want Faces the Challenge of Consumer Upgrade" (published in the 13th issue of the 2015 Securities Market Weekly).
Now I can't help but sigh, this is a different time.
At that time, it was the peak of consumption upgrades, and the products of Want Want and Master Kong were all without face; but today, they have the inside, not only have very good product functionality, but also have reached a new stage of rewarding shareholders.
The conversion of long and short positions is all due to the situation.The stock price of Uni-President is only at the level of twelve years ago in 2012, while the stock price of Master Kong is only at the level of fifteen years ago in 2009.
In the last decade, they have not enjoyed any valuation premium at all, which serves as a warning for those star consumer stocks that have enjoyed a consumption bubble in the past.