To The Moon

After a difficult year in 2022, the global market finally sees a glimmer of hope. As the Fed's policy faces a turning point, China has begun to focus on its economy, giving many institutions confidence that Chinese assets will rebound from last year's downturn. Our view is that "the global opportunity lies in China, the Chinese opportunity lies in consumption, and the consumption opportunity may lie in baijiu (distilled liquor)."

1. Macro cycle: global opportunity lies in China

1.1 Mismatch of Economic Cycles between Europe, America and China.

In the post-pandemic era, anti-globalization is becoming increasingly prevalent. There is an obvious mismatch in the economic cycles of major economies around the world.

Overall, Europe and the US have had similar rhythms. After the pandemic hit, QE resulted in a quick recovery, high inflation, and rapid interest rate hikes. It only takes two years for them to go through from overheating to stagflation. Even though the economic data in Europe and US has been surprisingly strong this year, actual GDP decline has become a foregone conclusion, and a recession may be unavoidable.

In contrast, due to its different approach to the pandemic, China has experienced an economic cycle completely different from that of Europe and the US. In recent years, China has maintained a relatively low CPI.

Although China's economic growth has also been under great pressure, the cycle has completely diverged from that of Europe and the US. We believe that in 2023, China will likely lead Europe and the US and be the first to enter the recovery cycle (refer to further information below).

Source: Bloomberg and Tiger Trade

1.2 A global focus attracts fund inflow.

As pandemic restrictions are lifted, China is once again focusing on economic development, and major global institutions are bullish on 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, the highest level of optimism since 2006.

Source: Bank of America

Goldman Sachs stated in its 2023 outlook that "China may become the only major country to achieve growth in 2023." Hao Hong, Chief Economist of Grow Investment Group, has also repeatedly expressed his views this year that "The picture of China's cyclical economic recovery is gradually unfolding."

In addition, overseas institutions are buying Chinese stocks in a frenzy. In January of this year, net buying of northbound funds achieved over RMB 140 billion, setting a record for the largest net inflow in a single month, surpassing the total volume of last year.

Source: Wind and Tiger Trade

2. Policy stimuli: Chinese opportunity lies in consumption

2.1 Policy direction is paramount.

The "Government Work Report" for 2023 sets the GDP growth target at about 5%. On the one hand, this target is lower than the previous two years, making it relatively moderate. On the other hand, compared to the real growth rate of 3% in 2022, it is a positive signal. It indicates that the top-level policy in China has firm confidence in the country's economic recovery this year.

Source: Wind and Tiger Trade

Stimulating consumption has become the top priority of this year's mission. The Government Work Report also emphasized, "We will focus on expanding domestic demand and give top priority to restoring and expanding consumption," indicating its significant increase in importance compared to previous years.

2.2 Recovery is around the corner, and consumer spending leads the way!

Since the beginning of the year, everyone has been able to feel intuitively that "recovery is happening around us."

According to statistics, the total daily subway passenger volume in Beijing, Shanghai, Guangzhou, and Shenzhen reached 35 million in February, completely recovering to pre-pandemic levels. At the same time, domestic trip in China also recovered to 70% of 2019 levels. China's Ministry of Culture and Tourism estimates that during the Spring Festival period, domestic tourism saw 308 million trips, achieving domestic tourism revenue of 375.843 billion yuan.

Source: Wind

From the latest released data on social retail sales in February, the overall social consumption data has improved across the board, with a year-on-year increase of 3.5%. It finally turned positive after a few months of decline. Among them, stimulated by multiple favorable policies, catering revenue has shown a significant recovery, with a year-on-year growth of 9.2%.

Therefore, the subjective feeling of individuals and the objective release of data both reflect the same fact: consumption in China is recovering!

3. Core assets: Chinese Baijiu presents investment opportunities

3.1 Baijiu are core investing opportunities in China.

In traditional Chinese culture and national conditions, white liquor has always played a pivotal role. It not only reflects the ups and downs of the consumer industry, but also to some extent, serves as the "barometer" of the Chinese economy.

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

In fact, there are not many listed companies in China's white liquor industry. The 19 white liquor companies who firmly occupy half of the main consumer industry are all members of CSI White Liquor Index. Therefore, investing in white liquor is investing in consumption!

3.2 Investment value is leading the way.

White liquor industry has relatively high gross profit margins/net profit margins with its special operating model. Thus, its ROE is generally higher than other industries. We have compiled ROE data for the China Securities Index for the White Liquor Industry, the China Securities Consumer Staples Index, and the China Securities Comprehensive Index from 2015 to 2022. White liquor has been leading ahead of the other two indices each year. Therefore, as a core asset, the white liquor industry also has better investment properties.

Source: Wind, Tiger Trade

For the members of CSI White Liquor index, the lowest sales gross margin is above 20%, and the highest can reach nearly 90%! It is a highly profitable industry with good brand effect and product moat.

source: csindex

At the beginning of this year, the first ETF that tracks China's Baijiu was launched on Hong Kong stock market – the E Fund(HK) CSI Liquor Index ETF $EFUND LIQUOR(03189)$ . From publicly available information, this product tracks the CSI White Liquor Index as its benchmark and has a maximum deviation of no more than 3% from the index's weightings and constituent stocks, making it a solid passive ETF.

ETFs that track Chinese A-share companies are very scarce in the Hong Kong stock market. Only big institutions like E-Fund dares to break through and innovate.

How to seize the revival of consumer spending, embrace the opportunity in China? How about looking at $易方达白酒(03189)$ - the core asset of China!

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