Update on the Chinese Consumer Environment

绝 密

July 2020

1

The State of the Chinese Consumer Pre Covid-19

2

China’s Economy Has Been Rapidly Transforming to One That is Driven by

Consumption

◆ The Chinese economy is transitioning from high growth to more moderate, stable growth

➢ As it has transitioned, consumption expenditures as a percentage of GDO has steadily increased

◆ Consumption has replaced exports and investment to become the driving force of China's economic growth

➢ Consumption upgrade, or the growth of the middle class, has been one of the main driving forces of this growth

2010- 2019 China GDP Growth Rate

Source: National Bureau of Statistics of China

41.248.8

53.959.3 64.1

68.674.0

82.190.0

97.2

10.6%

9.5%

7.9% 7.8%7.3%

6.9%6.7%

6.9% 6.6%6.2%

0%

2%

4%

6%

8%

10%

12%

0

20

40

60

80

100

120

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

GDP (RMB Trillion) GDP Growth Rate

44.9%

61.9%

54.9%

47.0%

48.8%

59.7%

66.5%

57.6%

76.2%

66.3%

46.2%43.4%

55.3%

46.9%41.6% 43.1%

33.8% 32.4%

(11.2%) (8.1%)

1.7% (2.3%)

4.3% (1.3%)

(9.6%)

8.6%

(8.6%) -20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Consumption Investment Net Export

Contribution Rate Of Consumption, Investment and Net

Exports To GDP Growth Rate In 2010-2018

3

Consumption Data Has Generally Been Better Than China’s Overall Macro

Data with Additional Room for Growth

◆ From 2010 to 2019, total retail sales of consumer goods grew rapidly, well in excess of overall macroeconomic growth

◆ The per capita disposable income of residents across the country has grown rapidly

◆ As the world's largest middle class market, China will provide a broad market space for new products and services

2010 – 2019 China's Total Retail Sales of Consumer Goods

15.518.1

20.723.4

26.2

30.1

33.2

36.638.1

41.318.4%17.1%

14.3%13.1% 12.0%

10.7% 10.4% 10.2%9.0%

8.5%

0.0%

5.0%

10.0%

15.0%

20.0%

0

5

10

15

20

25

30

35

40

45

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E

Growth rate of total retail sales of consumer Goods (%)

Total retail sales of consumer goods (RMB trillion)

1.31.5

1.71.8

2.02.2

2.42.6

2.8

3.110.4% 10.3%10.0%

8.1% 8.0%7.4%

6.3%7.3%

6.5%8.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E

National disposable income per capita (RMB ten thousand)

Actual growth rate (%)

2010 – 2019 Per Capita Disposable Income of National Residents

Source: National Bureau of Statistics of China

4

The Overall Market Has Grown Steadily With Less-Developed Urban and

Rural Markets Driving the Next Wave Of Consumption Growth

Some Categories Have Faced Pressure, but Overall Growth Has

Continued

Less-Developed Urban and Rural Markets Growth in Consumption Has

Injected New Momentum

◆ The gap between urban and rural consumption has narrowed, with thegrowth of the middle class in rural markets

◆ E-commerce expansion will drive rural market consumption◆ Retail channels:

➢ E-commerce continues to squeeze the traditional

retail channel

◆ Urban and rural areas:

➢ Urban and Rural

Consumption Potential

is Accelerating

◆ Total retail sales of consumer goods:

➢ Necessity goods such as automobiles, petroleum,

and food play an important role in stimulating

consumption and boosting the economy

➢ Textile and apparel, jewelry, office supplies, and other

categories have been below the overall growth rate of

retail sales

Consumer

Market

Comparison of Consumption Levels Between Urban and Rural Residents in

China Between 2010-2018(Unit: RMB ten thousands)

1.7

22.2

2.42.5

2.72.9

3.13.3

0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3

3.5%3.2% 3.1% 3.0% 2.9%

2.8% 2.7% 2.7%2.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0

0.5

1

1.5

2

2.5

3

3.5

2010 2011 2012 2013 2014 2015 2016 2017 2018

Consumption level of urban residents

Consumption level of rural residents

Source: National Bureau of Statistics of China

5

The Launch of the STAR Market Made 2019 An Important Year For A-share IPOs

Number of A-share IPOs 2014 - 2019

124223 227

438

105 133

2014 2015 2016 2017 2018 2019

# of IPOs approved by CSRC # of IPOs approved by Star Market

73 666

1,576 1,496

2,301

1,378

1,708

824

2014 2015 2016 2017 2018 2019

Fund Raising of IPOs approved by Star Market

Fund Raising of IPOs approved by CSRC

Capital Raising By A-share IPOs 2014-2019

9

3

2 21 1

56.9

27.5

38.4

32.1

16.8

9.7

0

10

20

30

40

50

60

0

2

4

6

8

10

Food andBeverage

Others Beauty ConsumerElectronics

Retail Household

# A-Share of IPOs Deal Size of IPOs

(Unit: RMB mm)

Number of A-share IPOs and transaction value of consumer companies in 2019

(Unit: RMB mm)

58 9

12

24

29

132 149

531

1,031

-100

100

300

500

700

900

1,100

0

5

10

15

20

25

30

Food, Beverageand Tobacco

Others Retail Durableconsumergoods and

clothing

Consumerservices

# of H-Share IPOs Deal Size of IPOs

Number of H-share IPOs and transaction value of consumer companies in 2019

(Unit: RMB mm)

Source: Dealogic and Wind

◆ In 2019, of China’s large consumer company IPOs, the food and beverage sector was particularly strong

18 A-share IPOs, raising RMB 181.4 billion 58 H-share IPOs, raising HK USD 1,870.8 billion

◆ 2019 was a big year for A-share IPOs. 203 A-share IPOs, raising RMB 253.3 billion (20 IPOs from STAR Market, RMB 82.4billion)

6

2019 Consumer Sector Highlights And Trends

4

13 14 13

18

14

18

2

69

1417

10 10

2013 2014 2015 2016 2017 2018 2019

Market cap above RMB 10 billion

Market cap between RMB 5 to 10 billion

Leading Companies Accelerated Listings

◆ The number of large companies in the consumer sector landing A-share, H-share,

and US stock exchange continues to increase

H share IPO listing

11/13/2019

Change since IPO: 20.7%

A share IPO listing

5/8/2019

Change since IPO: 71.3%

Capital Raising for Food & Beverage Businesses Has Been Active

A share IPO listing

7/12/2019

Change since IPO: 338.8%

A share IPO listing

1/25/2019

Change since IPO: 129.7%

A share IPO listing

6/19/2019

Change since IPO: 51.6%

A share IPO listing

11/13/2019

Change since IPO: 237.7%

5G starts commercial wave

◆ Growth of the commercial use of 5G has driven consumer electronics, content,

internet, medical health, automobile manufacturing and other industries

◆ The integration of AI, VR / AR, cloud computing and other technologies has

significant room for development

HealthcareIndustrial internet Consumer

ElectronicsContent Automobiles

Live Streaming E-commerce Is Growing Significantly

◆ Live streaming has become a new battlefield by major platforms

◆ Brands have established direct connections to fans and consumers (D2C, Direct

to Customer) through live streaming, further evolving traditional brands and the

retail industry

Taobao Double 11 Shopping

Festival Transaction value

Transaction value is

expected to increase in

the next three years

Source: Capital IQ, Huatai United Securities

7

The Impact of Covid-19 on the Chinese Consumer

8

10.0% 9.5% 7.9% 7.8% 7.3% 6.9% 6.8% 6.9% 6.8% 6.1%

(6.8%) (10%)

(5%)

0%

5%

10%

15%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q12020

China GDP Growth Rate from 2010 to Q1 2020

China GDP (YoY% growth)

9.8% 7.6% 7.5% 7.8% 7.2% 8.0% 8.0%

(20.5%) (20.5%) (15.8%)

(7.5%)

(30%)

(20%)

(10%)

0%

10%

Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20

China Retail Sales (YoY%)

Pandemic-Induced Economic Impacts Have Been Broad-Based

◆ Since COVID-19 was first detected at the end of 2019, the Chinese government rapidly undertook strong measures to control the spread

◆ China’s Q1 GDP registered its first decline since the economic indicator was first released in 1992. From January to March, total retail sales of

consumer goods reached 7,858 billion yuan, down 19% vs. the year prior, the first negative growth in history

◆ The quarantine period eroded between 20-90% of all key sector indicators including sales in the retail and consumer sectors

Main Activity Indicators by Sector In China – Impact after 55 Days of

Quarantine

Severely Impacted Sectors

Tourism,

transportation

and logistics

RetailReal Estate &

constructionIndustry & auto

Traffic of

passengers

-88%

Retail sales

-21%Real estate sales

-36%

Industrial

production

-14%

Hotel occupancy

-90%

Online channel

sales

+3%

Finished

residential works

-24%

Car sales

-79%

Source: National Bureau of Statistics of China

Total Retail Sales from Jun 2019 to Apr 2020

9

Major Indices Performance During and Prior to Covid-19

Key index performance YTD

-22%

-17%

-12%

-7%

-2%

3%

8%

13%

Jan-01-2020 Jan-16-2020 Jan-31-2020 Feb-15-2020 Mar-01-2020 Mar-16-2020 Mar-31-2020 Apr-15-2020 Apr-30-2020

MSCI China Index (MXCN) - Index Value MSCI China/consumer Discr (Sector) - Index Value MSCI China/consumer Staples (Sector) - Index Value

YTD returns

MXCN: -4.59%

MSCI Consumer Dircr: -3.56%

MSCI Consumer Staples: -2.75% China implemented travel

bans, Wuhan authorities

closed all transport hubs

including airports, railwayand bus stations

China’s finance autochories allocated

47 billion yuan for covid-19prevention and control work

Many companies rapidly adopted local productivity solutions to communicate and deliver weekly meetings, training, and lectures. Many multinational firms accelerated roll-out of productivity solutions

China’s GDP fell 6.8%in Q1 2020

China’s total retail sales fell20.5% in Feb 2020

Start of the COVID-19outbreak in China

Source: Capital IQ, Statista

During the outbreak of Covid-19

China's urban jobless rate

was at 5.9%

China’s tax watchdog unveiled a

guideline, involving 12 detailed

items to reduce financial

pressure in key sectors

10

The Various Impact of Covid-19 on Consumer Subsectors

Retail & Consumer Sectors

◆ The epidemic has transformed online consumer

behavior

➢ Online penetration and home delivery have

rapidly increased

➢ Change in grocery shopping frequency and

methodology have increased the basket size,

which should help margins impacted by high

distribution costs for smaller basket sizes

◆ The short-term impact of the epidemic on

physical shops is expected to be considerable,

particularly for luxuries or treats

➢ The epidemic has accelerated the pace of online

and offline penetration and the development of

multichannel propositions

Online

retail

Traditional

retail

Hotel,

dining and

leisure

Food and

beverage

◆ Epidemic dramatically impacted the hotel,

dining and leisure sectors

➢ Reduced movement of people during the

epidemic, suspension of domestic tour groups

and the closure of places for social functions has

been a heavy blow to this subsector

➢ With large fixed costs, small and medium-sized

hotels and restaurants are facing severe

challenges

◆ Various impact on food and beverage

➢ The epidemic has had a short-term impact on

the F&B gift segment, such as tobacco and

alcohol

➢ The impact on meat, convenience foods,

seasonings and dairy products has been limited

Source: PwC, Deloitte

11

How the Chinese Consumer Has Responded Post Reopening

12

Various Initiatives Have Been Established to Support the Economy and to

Promote Positive Consumer Sentiment

◆ China began to show a slowdown in the number of new cases in mid-Q1, leading to the start of the economic reopening in

March 2020

◆ Various initiatives have been established to support the economy and to promote positive consumer sentiment in order to

bolster consumption trends

The People’s Bank of China has implemented various measures in recent months to stimulate the economy

Source: Bain, Lessons from Chinese Restart as of April 2020

◆ Announced fiscal stimulus

package of RMB 3.6

Trillion ($500 billion USD）

in May 2020

◆ Implemented monetarypolicy measures including:➢ Easing of reserve

requirements andlending rates

➢ Lending support throughissuance and a 19%increase in bank loans

➢ Offering potential todefer loan repayments

◆ Potential for incrementalstimulus exists, asstimulus program iscomparatively lowerrelative to other countries

◆ Stimulus as a of GDP:➢ ~1-4% for China vs ~11%

for the U.S.

◆ China spent more than

1.2T yuan ($170 bn) in

February buying shares to

shore up prices

◆ The Shanghai Index has

only decreased ~2.7%

since December

13

8.6 9.8 7.6 7.5 7.8 7.2 8.0 8.0

(20.5)(15.5)

(7.5)(2.8) (1.8)

(25)

(20)

(15)

(10)

(5)

-

5

10

15

May 2019 Jun Jul Aug Sep Oct Nov Dec Jan-Feb2020

Mar Apr May June

Several Factors on Both the Production and Consumption Side Indicate the

Positive Impact of the Stimulus On Economy

Production

(13.5%)

(1.1%)

3.9% 4.4% 4.8%

Jan/Feb-20 Mar-20 Apr-20 May-20 Jun-20

As exports typically lag industrial output, industrial output has rebounded stronger than

exports though both are trending positively

(19.1%)

3.1% 1.1%

(1.4%)

2.6%

Jan/Feb-20 Mar-20 Apr-20 May-20 Jun-20

Export, YoY Change

Consumption

(37.0%)

(18.1%)

0.0% 3.5%

(8.2%)

Jan/Feb-20 Mar-20 Apr-20 May-20 Jun-20

Automobile sales, an indicator of consumer discretionary income, rebounded sharply until May before falling in June while retail sales improved at a stable rate

Retail Sales, YoY Change

(17.6%)

(12.0%)

(4.6%)

(0.8%)

0.2%

Jan/Feb-20 Mar-20 Apr-20 May-20 Jun-20

Monthly Growth Rate of Total Retail Sales of Consumer Goods (%)

China starts

to re-open in

March

Source: National Bureau of Statistics of China

Automobile Sales, YoY ChangeIndustrial Output, YoY Change

14

China Is Recovering with Consumption Returning

Consumption data in mainland China for the May Day holiday (1-5 May), the first long weekend post COVID-19 pandemic, hints at a strong recovery and new

momentum in various segments

Source: Huatai Research

• Gross merchandise volume (GMV) of thedomestic/imported fresh food on 148 / 151%yoy JD.com grew

• Pinduoduo saw total orders ofagricultural/personal care products surgeby 160/210% yoy

◆ Online grocery shopping remains robust

➢ Growth momentum in online grocery shopping in China has been robust since the 2020 Chinese New Year holiday as people move theirgrocery shopping online as part of social distancing

◆ Traffic has ticked up at shopping centers, particularly in lower-tier cities

➢ Relaxation of quarantine measures in China has led to increased foot traffic at major domestic shopping centers

➢ According to the Winneryun platform, foot traffic at shopping centers nationwide have recovered to 62.3% of normal levels as of 2 May

➢ Specifically, Tier-3 cities recovered to 68% of the norm, versus 58/65% for Tier-1/2 cities

◆ Consumers have spent more than usual on health

➢ Consumers in China appear to be placing increasing emphasis on health in the post-pandemic period, as evidenced by the sharp rise indemand for health-related products and services during the May Day holiday

➢ For instance, spending on sports and fitness tripled month on month during 1-3 May, according to data from WeChat Pay, while GMV ofsportswear products increased by 85% mom during 1-5 May on JD.com

◆ Catering has accelerated amid vibrant nightlife

➢ Catering was among the key sectors that resumed. Per Ministry of Commerce, the consumption recovery index of the catering sector wasup by 18.8% during 1-5 May from that in the Qingming holiday

➢ Spending on catering services had recovered to 70% of that in the same period a year ago

◆ Leisure and entertainment services rebound

➢ As social activities in China are gradually returning to normal in the post pandemic period, experience-based leisure and entertainmentconsumption has ramped up

➢ During 29 April to 3 May, beauty-related activities such as manicure and spa services booked through Meituan doubled month on month

➢ The transaction volume of WeChat Pay for leisure services rose by 521% mom during 1-3 May