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