2012 China Consumer Survey

2012 China Consumer Survey

Consumer places more emphasis on food quality in 2012

Key findings:
We recently undertook an online survey of Chinese consumers’
consumption behaviour. Our key findings follow:
 Consumers are cautiously optimistic about the economy.
 A reduction in discretionary spending under the economic downturn is
less than expected.
 Luxury is more sensitive to an economic downturn than an upturn.
 Consumers place daily necessities as their top priority for trading up.
Potential implications of the survey
We see two main implications from our key findings:
 The downside risk for discretionary appears limited.
 Leading brands in daily necessities are likely to benefit from consumers
trading up given the likely better quality control, broad product range and
product innovation.
Actions:
 We believe that discretionary stocks have mostly priced-in the downside
risk. This, together with our survey finding of only limited downside
risk of reduced discretionary spending in a downturn and our house view
of a v-shaped recovery in China’s GDP, underpins our preference for
discretionary over staples. Top picks: Daphne (210 HK, Buy) and I.T
(999 HK, Buy).
 In staples, we recommend Mengniu (2319 HK, Buy) and Yurun (1068
HK, Buy), given consumers’ emphasis on trading up in these categories;
they are the leading brands in their respective segments. While these
companies have suffered some setbacks in recent times, we believe
consumers will come back to these leading brands in the long run since
they would likely have better quality control. As such, we recommend
investors purchase these stocks at current cheap valuations.

A survey on consumers’ consumption behaviour
We recently undertook an online survey of Chinese consumers’ consumption behaviour.
650 volunteers participated and 21%, 34%, 27% and 18% of them were in the age
groups of 17-25, 26-35, 36-45 and >45, respectively. 52% of the participants were male
and 48% female.

Our questionnaire focused mainly on “2012 CNY spending compared with 2011 CNY”,
“which consumer categories are likely to increase consumption in 2012 CNY”, “2012
economy and inflation outlook”, “consumer behaviour under various scenarios” etc.

Key finding 1: Consumers cautiously

optimistic about the Chinese economy
Based on our survey, recent economic negative news such as the slowdown in China
industrial production growth and the sharp decline in CPI (source: National Bureau of
Statistics) have not yet rattled consumers’ spending desire for CNY, in our view.
Respondents were also cautiously optimistic about the Chinese economy for 2012.

2012 CNY – Spending as usual

The recent economic slowdown does not appear to affect spending
In our survey, we observed a general increase in respondents’ spending budget for 2012
CNY compared with 2011 CNY spending. The average spending budget increased by
about 15% y-y, compared with 2011 CNY retail and catering to sales growth of 19% y-y
(source: MOFCOM). While growth has slowed slightly, nevertheless, it was much higher
than the CPI for 2011, with Nomura estimate of 5.4%p.a. This suggests that the recent
economic slowdown has yet to affect the general population, in our view. Respondents
earning between Rmb4,501-8,500 per month (i.e. the middle class) plan to increase their
spending by over 18% on an average, the most across different wage bands. On an
average, respondents expect to spend 1.4 months of their monthly wage for 2012 CNY.

The primary reason for the increase in spending was due to inflation (74%). This was
followed by respondents wanting to increase consumption (37%) which edged out
wanting to purchase better quality products (32%).

Increase in consumption in apparel & footwear, restaurants and gifts
Over 50% of respondents expect to spend more money in apparel & footwear,
restaurants and gifts during 2012 CNY. The results were in line with our expectation as
during CNY people are likely to go out for shopping and dine out more. Beverages
received the least votes, which is likely due to the lower demand given the cold weather.

China consumers are cautiously optimistic
Around 54% of the respondents expect the economy to remain the same or be better
than 2011. Only 11% of the respondents expect the economy to worsen significantly.
Hence, on average, respondents are cautiously optimistic about the economy. Further
analysis shows that respondents with higher income expect the economy to deteriorate
more than respondents with lower income. This is likely because they are more in tune
with current news and thus are more affected by recent negative news in our view.
In terms of food inflation, most respondents expect it to be moderate. This is in line with
our in-house view of 4.0% p.a. CPI for 2012. A notable portion of the respondents expect
food inflation to be high. 0% respondents expect food inflation to decrease significantly.

Key finding 2: Downside risk for discretionary limited; we prefer discretionary over staples

Just over 40% of the respondents indicated that they would reduce consumption should
the economy deteriorate. Of these respondents, 53% indicated they would reduce
apparel and footwear spending in such a scenario. This translates to less than 22% of
the overall respondents reducing apparel and footwear spending in the event of an
economic downturn, much less than our expectation.

Furthermore, our house view is that the Chinese economy will experience a v-shaped
recovery in 2012 where China’s economy will slow sharply in 1Q12 and a loosening and
a pick-up in public housing investment should help support growth beyond 1Q12. For
2012, our economist forecasts GDP to grow by 7.9%, which is still quite strong. Hence,
with lower-than-expected downside risk coupled with expected high GDP growth, we
believe the time is right to accumulate stocks in this sector as the risk of economic
downturn is likely to have been priced in, in our view. This is also consistent with our
sector strategy of discretionary outperforming staples in 2012.

It is also interesting to note that over 27% of respondents who would reduce
consumption during an economic downturn indicated that they would reduce spending in
“beverage and snacks” and alcohol. This suggests that stocks of these categories, which
are generally considered to be staples and thus defensive, may not be defensive after
all.

Key finding 3: Luxury more sensitive to an economic downturn than an upturn

In addition to understanding consumers’ behaviour under an economic downturn
scenario, we also asked respondents about their consumption behaviour when the
economy is stable/upward-sloping and when their income is growing by 10-15%
annually. By comparing their responses under the two scenarios, we observed that
luxury categories are more sensitive to an economic downturn relative to an upturn. For
example, 18% of respondents indicated that they would increase consumption in luxury
watches and hand bags under an upturn scenario. This compares with 42% of the
respondents reducing consumption in the same category under a downturn scenario.
Thus, this means that at the moment, even though we forecast a v-shaped recovery, the
luxury industry is likely to have more downside risk than upside risk, in our view.

Other interesting points to note:
 Over 60% of respondents would increase consumption in daily necessities
under an upturn scenario. This percentage is much higher than our expectation
which is likely due to respondents’ desire to purchase better quality food given
the food scandals over the past couple of years, in our view.
 Cosmetics, a category generally considered to be staples, are quite sensitive to
economic changes, contrary to our expectation.

Key finding 4: More priorities on trading up daily necessities
Leading brands likely to benefit from trading up: Buy Mengniu and Yurun
Respondents place high priority on quality (i.e. trading up) of daily necessities items such
as grain & edible oil, fruit & vegetables, meat & poultry and milk & dairy products. This
shows that respondents view daily necessities as most important and are still very
concerned about the quality of these items due to the ongoing food safety scandals.
Thus, given higher income, respondents would first trade up in these categories.
We believe this behaviour will benefit leading brands as these companies would likely
have better quality control in the long run, a broader product range to satisfy consumers’
needs and product innovation. While companies such as Mengniu and Yurun have
suffered some setbacks in recent times, we believe consumers will come back to these
leading brands in the long run since they would likely have better quality control. As
such, we recommend investors purchase these stocks at current cheap valuations.

Low trade-up desire for beverages, alcohol and tobacco
It appears that respondents do not see much need to trade up for beverage, snacks and
confectionary, alcohol and tobacco at this stage (less than 7% of respondents chose
these categories as their priorities). This result suggests that “trading up” may be slower
than expected for beverages, brewery and snacks companies such as CRE (291 HK,
Neutral), Tsingtao (168 HK, Reduce), Tingyi (322 HK, Reduce) and Want Want (151 HK,
Neutral).

Trade-down risk limited even under an economic downturn
When asked about their food consumption behaviour under an economic downturn
scenario and a high food inflation scenario, only 2% respondents said they would tradedown
to lower quality products. This shows that consumers are very “sticky” in terms of
food quality: they would only consider trading up. Thus, trade-down risk is very limited for
food and beverages companies.

Other findings
Salary – low-income earners have low expectations on wage growth
While the government has indicated that it targets to increase minimum wages by an
average of at least 13% annually up to 2015, it appears that respondents don’t have
similar expectations. The majority of the respondents with a monthly wage of less than
CNY2,000 indicated that they only expect a less than 5% wage increase for 2012. This
may be because many respondents have received pay increases in 2011, so they do not
expect an increase in 2012, in our view.

Low percentage of respondents having an investment property
Only 20% of respondents indicated that they invest in the property market, with highincome
earners more likely to do so than low-income earners. For respondents with
investment properties, should property prices drop by 20% next year, their behaviour
would be similar to the case when the economy deteriorates (i.e. Figure 9 vs. Figure 19),
in our view. This suggests to us that respondents view property prices as more of a
proxy for the general economy.

China F&B and branded retail: Rating summary