Global opportunity in Chinese liquor!

After a difficult 2022, the global market is finally seeing a glimmer of hope. As the Federal Reserve's policy faces a turning point, China has begun to focus on its economy, which has convinced many institutions that Chinese assets will rebound from last year's slump. We believe, “Global opportunities lie in China, Chinese opportunities in consumption, and consumption opportunities may lie in liquor.”
1. Macro cycle: global opportunities in China
1.1 The economic cycles of Europe, America and China do not match.
In the post-pandemic era, anti-globalization is becoming more common. There is a clear mismatch in the economic cycles of the world's major economies.

Overall, Europe and America have similar rhythms. After the pandemic hit, QE led to a rapid recovery, high inflation, and rapid rate hikes. It only takes two years for them to go from overheating to stagnating. Despite unexpectedly strong economic data for Europe and the US this year, a decline in real GDP is a foregone conclusion, and a recession may be inevitable.

In contrast, China has experienced a completely different economic cycle from Europe and the US due to the different ways in which China responds to the pandemic. China's CPI has remained low in recent years.

Although China's economic growth is also under tremendous pressure, it has completely deviated from the economic growth cycles of Europe and the United States. We believe that by 2023, China may lead Europe and the US and take the lead in the recovery cycle (see below for details).

Source: Bloomberg and Tiger Trade

1.2 Global focus attracts capital inflows.
With the lifting of pandemic restrictions, China is once again focusing on economic development, and major global institutions are optimistic about China's economic recovery. According to a global fund manager survey conducted by Bank of America in early January, 91% of global fund managers expect China's economy to continue to grow strongly, which is the highest level of optimism since 2006.

Source: Bank of America

Goldman Sachs (Goldman Sachs) said in its 2023 outlook, “China may become the only major country to achieve growth in 2023.” Hao Hong, chief economist at Grow Investment Group, has also stated several times this year that he believes “the picture of China's cyclical economic recovery is gradually unfolding.”

Furthermore, overseas institutions are feverishly buying Chinese stocks. In January of this year, the net purchase of capital to the north surpassed 140 billion yuan, setting a record for the largest net inflow in a single month, exceeding last year's total.

Source: Fenghu Trading

2. Policy incentives: China's opportunity lies in consumption
2.1 Policy direction is critical.
The 2023 “Report on the Work of the Government” set a GDP growth target of around 5%. On the one hand, this target is lower than the previous two years and is relatively moderate. On the other hand, this is a positive sign compared to the real growth rate of 3% in 2022. It shows that Chi's top strategy Li Na is confident about China's economic recovery this year.

Source: Fenghu Trading

Stimulating consumption has become the top priority of this year's task. The government work report also emphasized, “The importance of focusing on expanding domestic demand and putting the recovery and expansion of consumption first has increased significantly compared with previous years.

2.2 Recovery is imminent, and consumer spending is leading the way!
Since this year, everyone has intuitively sensed that “recovery is happening all around us.”

According to statistics, the total daily subway passenger traffic in Beijing, Shanghai, Guangzhou and Shenzhen reached 35 million in February, fully recovering to pre-pandemic levels. Meanwhile, travel within China has also recovered to 70% of 2019 levels. China's Ministry of Culture and Tourism estimates that during the Spring Festival, the number of domestic tourists was 0.308 billion, achieving domestic tourism revenue of 375.843 billion yuan.

Source: Wind Energy

Judging from the latest social retail data released in February, the overall social consumption data improved overall, with a year-on-year increase of 3.5%. After months of decline, it finally turned positive. Among them, under the impetus of a number of favorable policies, food and beverage revenue showed a marked recovery, with a year-on-year increase of 9.2%.

As a result, personal subjective feelings and the objective publication of data reflect the same fact: China's consumption is recovering!

3. Core assets: Chinese liquor provides investment opportunities
3.1 Liquor is a core investment opportunity in China.
Liquor has always played an important role in traditional Chinese culture and national conditions. It not only reflects the ups and downs of the consumer industry, but to a certain extent, it is also a “barometer” of the Chinese economy.

According to the latest statistics, food, beverages, and tobacco account for 80% of major consumption, and 66% of this 80% is liquor.

In fact, there aren't many listed companies in the Chinese liquor industry. The 19 liquor companies that firmly account for half of the major consumer industries are all members of the China Securities Liquor Index. Therefore, investing in liquor means investing in consumption!

3.2 Leading investment value.
The liquor industry has a relatively high gross margin/net profit margin due to its unique business model. As a result, its return on net assets is generally higher than other industries. We have compiled return on net assets data for the China Liquor Industry Stock Index, China Securities Consumer Goods Index, and China Securities Composite Index from 2015 to 2022. Liquor is ahead of the other two indices every year. Therefore, as a core asset, the liquor industry also has good investment attributes.

Source: E-Funda Fund (Hong Kong)

ETFs tracking Chinese A-share companies are scarce in the Hong Kong stock market. Only big organizations like E-Fangda dare to break through and innovate.