Greater China Consumer:Shanghai marketing feedback

What did we discuss during the marketing?

    Recent channel checks with food and beverage distributors in Shenzhen: Fordairy sector, distributors indicated that major brands are avoiding pricecompetition, and will invest more in branding. Distributor also indicated thatUPC (220.HK) was gaining market share in instant noodles. This is in line withwhat we learnt from listed companies’ 1Q16 results analyst meetingsCross-border ecommerce update – The new regulation are still confusing and itpoints to straighter control, according to the industry expert we talked to. Wereiterate that brands’ global pricing harmonization will be the best strategy toavoid grey market and price arbitrages.

    Sub-sectors that might outperform: 1) The CPI figure has been better than themarket expected. Thus, we witnessed better SSS growth for hypermarket in1Q16. 2) Lower raw material prices will benefit some sub-sectors’ GPM, suchas dairy and white goods in 2016. 3) The beauty, health and wellness trendcontinues in China, which should benefit cosmetic and sportswear segment.

    Meanwhile, we believe some management teams might look for corporateactivities to unlock value, e.g. privatization, spin-off, restructuring.

    Stock picks: top buy ideas - Anta; L’Occitane, Belle. Top sell ideas - Biostimeand Li & Fung.

    Key pieces of feedback from investors:

    Most discussed areas are sportswear, luxury, dairy sectors and recent updateon CBEC channel new regulations.

    Investors agree with us that new CBEC channel regulation have broughtinterruptions to certain names such as Biostime and Sa Sa, but most investorsprefer to take actions until the regulation is more clear.

    Most investors still expect sportswear sector to outperform most of othersectors helped by the health and wellness trend, but some investors alsoexpressed their concerns on whether growth would slow down in near-term.

    As the inflation are picking up in 1Q16, some investors are asking whetherconsumers will purchase more gold products and therefore benefit jewelrynames, yet we have not see the trend in this round of inflation.

    In staple, most investors agreed that UPC is well positioned in trading-uptrend. Investors generally expect dairy sector to have gross margin expansionthis year, and expect the over-supply issue to be relieved by government’sincreasing regulation on reconstituted milk.