The Zhitong Finance App learned that Debon Securities released a research report saying that with the implementation of the debt conversion policy, they are optimistic that the food and beverage sector is trending upward. There are frequent favorable policies, and fundamental inflection points are expected to occur. Market expectations for domestic demand gradually improved last week, and liquor is expected to benefit as a core sector, while beer's short-term performance is under pressure, and the tone of structural upgrading remains unchanged. At the same time, the post-epidemic recovery situation in downstream industries such as food, catering, condiments, snacks, health products, cosmetics, etc., has led to a recovery in demand for upstream additives, while the dairy consumption scene continues to recover. The medium- to long-term high-end and diversification trends have not changed, and I am optimistic about the overall increase in the health food and drink sector.

The main views of Debon Securities are as follows:

Liquor: Focus on sector recovery opportunities as domestic demand expectations improve.

The liquor sector rose 6.85% last week. Market expectations for domestic demand gradually improved, and liquor as the core sector is expected to benefit. We believe that it is currently still at the bottom of the fundamentals. The general decline in revenue of listed companies in the third quarter is beneficial to channel inventory digestion. Early policies were introduced intensively, and policy transmission will still take time, so we are optimistic about the room for future growth. The liquor sector recommended layout industry leaders, recommended liquor such as Kweichow Moutai, Wuliangye, Luzhou Laojiao, Shanxi Fenjiu, Gujing Gongjiu, Yingjia Gongjiu, etc., and the flexible layout was Laobaijiao, Shunxin Agriculture, Alcoholic Liquor, etc.

Beer: Short-term performance is under pressure, and the tone of structural upgrades remains unchanged.

In September 2024, the beer production rate of enterprises above the scale in China was +1.4% to 2.904 million kiloliters, and the cumulative output in January-September was -1.5%. Judging from the three quarterly reports of beer companies, the 2024Q3 sales volume of Qingbeer/Heavy Beer/Yanjing Brewery was -5.1%/-5.6%/+0.2%, respectively, and the tonnage price was -0.2%/-2.4%/+0.03%, respectively. Overall performance was pressured by weak recovery in demand and the weather, but throughout the year, it is expected that major beer companies' high-end products will drive a steady upward trend in tonnage prices.

With the introduction of a series of policies to stimulate consumption, terminal demand is expected to improve. We believe that the restoration of ready-to-drink scenarios such as restaurants is expected to continue to upgrade the beer structure. Currently, the valuation level of leading companies is at a low level. It is recommended to focus on relatively stable high-quality leaders and those with the potential for reform, such as Tsingtao Brewery and Yanjing Beer.

Condiments: Reforms continue to be carried out, focusing on improvements.

The overall performance of condiments in 2023 was under pressure. On the one hand, terminal demand recovered slowly, and on the other hand, changes in demand structure. High cost performance became the main demand line, and fragmented channels seized market share. In response to changes in the general environment, leading companies are making changes from different angles:

a) Haitian flavor industry is speeding up changes in products, channels, supply chain, internal management, etc. In 2024, the company's business performance is expected to improve;

b) Zhonghu Hi-Tech's internal management has improved markedly, and China Resources executives have settled in to sort out and restructure business processes, optimize supply chain and performance management, and accelerate the company's market-based management reform;

c) Qianhe flavor industry accurately locates zero-addition segmented tracks and enjoys the dividends of racetrack expansion;

d) Tianwei Foods acquires food-derived foods, complements online small B channels, expands small B product matrix, and opens up a second growth curve.

Since the beginning of the year, the recovery trend in terminal demand has continued; looking ahead to the whole year, low-base dividends are expected to be released, and the condiment revenue side is expected to improve. The proposal focuses on the Zhongju Hi-Tech and Haitian flavor industries, which have an improvement logic.

Dairy products: The consumption scenario continues to recover, and the medium- to long-term high-end and diversification trends remain unchanged.

The dairy industry benefited from falling milk prices in 2023, and profit elasticity was higher than income elasticity; as consumer confidence gradually recovered and public health awareness deepened, the medium- to long-term high-end and diversification trend remained unchanged. Check out the new categories:

(1) The cheese market continues to grow, and the variety of cheese snacks tends to be rich. The penetration rate of table cheese continues to increase. At the same time, the consumption scenario gradually recovers, and the ecological margins of the industry improve over the long term.

(2) In the post-pandemic era, public demand for nutritional upgrades is prominent. The concept of fresh nutrition for low-temperature dairy products has been accepted. At the same time as penetration rates have increased, competition is also more diverse, and there is plenty of room for racetrack development. It is recommended to pay attention to Yili Co., Ltd. and Mengniu Dairy.

Catering supply chain: The promotion fee policy has been implemented, and funding and policy aspects have been significantly improved.

The food and beverage supply chain targets began to gradually come under pressure in 2023H2, mainly due to the relatively weak demand in terminal stores under the “cost performance” consumption trend. Judging from the three-quarter report, the overall performance of the sector is under pressure. From a valuation perspective, the valuation level of most companies is already at a low level, and the margin of safety is sufficient. Therefore, along with favorable policies, overall terminal demand in subsequent sectors is expected to improve quarterly. It is recommended to focus on relatively steady leading companies and flexible performance targets such as Yasui Foods, Ligao Foods, Polar Foods, and Qianmiyang Chef.

Snack food: The performance of the Q3 sector is further divided, focusing on Q4 stocking and high potential energy targets.

Looking back at 24Q3, the rest sector recovered month-on-month after experiencing high prosperity in Q1 and the impact of the off-season of traditional sales in Q2. However, due to changes in sector channels, there is a trend of further differentiation in the performance of various targets within the sector. Leading high-potential companies actively adapt to channel changes, create large single products around “quality and price ratio”, continuously increase market share by improving products and channel power, and ensure reasonable profit margin levels by reducing upstream and downstream costs and increasing efficiency; those with poor performance are also actively seeking changes to reverse the difficult situation.

Therefore, it is recommended to focus on: 1) Continued dividend targets such as Friend Foods, Three Squirrels, Yanjin Shop, Jinzai Food, and Ganyuan Food; 2) Targets that are expected to reverse the predicament, such as Qiaqia Foods and Liangpin Stores.

Food additives: demand is gradually picking up, and the development trend is improving.

The post-epidemic recovery situation in downstream industries such as food, catering, health products, cosmetics, etc., has led to a recovery in demand for upstream additives. In particular, demand for health products has exploded under the trend of focusing on health, and I am optimistic that the overall volume of the health food additive industry will increase. It is recommended to pay attention to the recovery in demand for drink-related additives, such as dietary fiber, sugar substitutes, prebiotics, probiotics, etc.; it is also recommended to focus on supplements such as lutein, prebiotics, dietary fiber, etc. It is recommended to pay attention to Bailong Chuangyuan and Chenguang Biology.

Investment advice:

Liquor section: We recommend Guizhou Moutai (600519.SH), Wuliangye (000858.SZ), Luzhou Laojiao (000568.SZ), Shanxi Fenjiao (600809.SH), Laobaijiao (), Old Baijiao (600559.SH), Yingjia Gongjiu (), Gujing Gongjiu (000596.SZ), etc. 603198.SH

Beer section: We recommend Tsingtao Brewery (600600.SH), Chongqing Beer (600132.SH), Yanjing Beer (000729.SZ), and we recommend paying attention to China Resources Beer (00291).

Soft drink sector: It is recommended to focus on Dongpeng Drink (605499.SH) and Nongfu Spring (09633).

Condiments section: It is recommended to focus on Zhongju Hi-Tech (600872.SH) and Haitian Flavors (603288.SH), which have improvement logic.

Dairy products sector: It is recommended to focus on Yili Co., Ltd. (600887.SH) and Mengniu Dairy (02319).

Catering supply chain sector: Currently, the valuation level of most companies is at a historically low level, and the margin of safety is sufficient. Along with promoting terminal consumption in terms of policies, it is recommended to focus on leading companies with more resilient performance and flexible standards such as Yasui Foods (603345.SH), Ligao Foods (300973.SZ), Senmio Chef (001215.SZ), and Baoli Foods (603170.SH).

Casual snack sector: At present, it is recommended to focus on continuing dividend targets such as Friend Foods (603697.SH), Yanjin Shop (002847.SZ), Jinzai Foods (003000.SZ), and Ganyuan Foods (002991.SZ), and targets that are expected to reverse the predicament, such as Three Squirrels (300783.SZ) and Qiaqia Food (002557.SZ).

Food additives section: It is recommended to focus on Bailong Chuangyuan (605016.SH) and Chenguang Biotech (300138.SZ).

Market review

Sector Index Performance:

The food and beverage sector outperformed the Shanghai and Shenzhen 300 Index by 2.78 pct last week. From November 4 to November 8, the Shanghai and Shenzhen 300 rose 6.57% on the five trading days last week, and the food and beverage sector rose 9.35%, ranking 6th in Shenwan (2021)'s Tier 1 industry.