Huaxi Securities released a research report stating that the Renminbi exchange rate has continued to strengthen recently. A review of history shows that during appreciation cycles, the food and beverage sector typically outperforms the broader market. This round of appreciation is expected to drive a resonance recovery in the sector's costs, demand, and valuations through three pathways: reducing import costs, boosting domestic demand sentiment, and attracting increased foreign capital allocation. Related thematic stocks are anticipated to benefit. The main views of Huaxi Securities are as follows: The recent acceleration in the Renminbi's appreciation saw the offshore rate break through 7 on December 25th, with the onshore rate reaching 6.96 on January 22nd. Strengthening intrinsic economic momentum coupled with enhanced competitiveness of export products suggests the Renminbi exchange rate is expected to maintain its appreciating trend. Reviewing the two previous Renminbi appreciation cycles from May-November 2020 and November-December 2022, the food and beverage sector achieved excess returns of 18% and 12% respectively relative to the CSI 300 Index, demonstrating strong performance and significantly outperforming the benchmark. This current Renminbi appreciation cycle is also expected to drive a triple resonance in the sector: falling costs, rising demand景气度, and valuation repair. From a cost perspective, Renminbi appreciation lowers the converted price of imported raw materials, driving down manufacturing costs and subsequently leading to profit improvement. Key raw materials involved include soybeans, palm oil, oats, barley, and tree nuts, among others. On the demand side, the recovery in domestic demand serves as the fundamental support for the currency's strength, and Renminbi appreciation will further reduce the cost for enterprises to replenish inventories, prompting the industry to shift from "passive destocking" to "active restocking." Inventory replenishment and capacity expansion will, in turn, strengthen the resilience of domestic demand, creating a virtuous cycle. As a consumer staple, the food and beverage sector has stronger certainty regarding domestic demand recovery, and its景气度 is expected to continue rising. From a capital flow perspective, ample liquidity during the Renminbi appreciation cycle, coupled with increased motivation for foreign capital to flow into A-shares, brings liquidity premium to the sector. As one of the consumer sectors with a relatively high proportion of foreign holdings, the food and beverage sector is poised to benefit from valuation repair driven by increased foreign allocation. Investment recommendations: Benefiting from the sector's triple resonance, focus on three main themes: 1) Cost红利: Key recommendations include Ximi Food, LIGAO Foods, Milkground, Qiaqia Food, and H&H International; 2) Rising景气度: Key recommendations include Anjoy Foods, Qianwei Yangchu, Youran Dairy, China Modern Dairy, New Hope Dairy, and Wanchen Group; 3) Valuation repair: Key recommendations include Yili Group, China Mengniu Dairy Company, By-Health, Weilong Delicious Food, and Yanjin Palace. Risk warnings: Renminbi exchange rate fluctuations exceeding expectations, rebound in international commodity prices, domestic demand recovery falling short of expectations.
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