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Credit Suisse sees strong future for domestic Chinese consumer brands

The policy of "Dual Circulation", which will guide China's economic development for years to come, has driven an upsurge in domestic demand for Chinese consumer brands, according to Credit Suisse Securities Research analysts presenting at the 8th annual China A- Shares Conference.

The Credit Suisse 8th China A-Shares Conference, taking place online from May 11-13, 2021, provides a platform for investors to explore the emerging trends in one of the world's largest and most dynamic stock markets. Participating in this year's conference are more than 70 leading A-share listed companies spanning 12 sectors including technology, healthcare, consumer discretionary, industrials and autos and representing a total market capitalization of over RMB 9,147bn (USD 1,412.8bn).

Edmond Huang, Head of China/Hong Kong Securities Research, Credit Suisse, described "Dual Circulation" as a strategic choice to rebalance the Chinese economy away from an overreliance on external demand, provide a catalyst for unleashing domestic demand and achieve more sustainable development.

"On the supply side, China will step up technological innovation to move along the global value chain. On the demand side, it aims to boost household incomes to stimulate domestic demand," Mr. Huang said.

The global pandemic and rising geopolitical tensions have been two principal drivers of the "Dual Circulation" strategy, an inversion of China's previous strategy of globalization and trade-led growth.

The contribution to the Chinese economy from net exports is no longer as significant as it was 20 years ago, while the ageing population and growing wallets of Chinese consumers have also been a significant contributor to this new economic development model.

"Chinese brands have made remarkable progress in upgrading the quality of their products, with better aesthetics, innovation, and technology enhancements contributing to their overall enhanced appeal. They also have advantages in being able to adapt their products faster to changing consumer sentiment," Mr. Huang added.

This has, in turn, driven a strong sense of national pride in Chinese brands from domestic consumers. The phenomenon, known as "China Pride", is manifesting itself particularly for products such as sportswear, cosmetics, mobile phones and electric vehicles.

"Confidence in Chinese brands has been slowly growing for a number of years, but it accelerated through the pandemic," said Lei Chen, China consumer analyst with Credit Suisse's China Quantitative Insight (CQi). "The improved product quality, marketing and distribution strategy, in addition to an increasing skepticism towards imported goods, especially foodstuffs, during Covid, have contributed to the rise of homegrown labels in China," Ms. Chen continued.

While the "China Pride" phenomenon is more pronounced among a younger generation that is largely wealthier than their parents were at the same stage in their lives, those younger consumers are also making luxury purchases earlier. This is one of the reasons why Credit Suisse analysts view this phenomenon as a long term trend for investors.

"Younger consumers are spending money earlier and are a key aspect of this "China Pride" idea that will become increasingly more meaningful as they mature into the next generation of older shoppers," Ms. Chen said.

Credit Suisse analysts expect those sectors hit hardest by Covid-19 in 2020, such travel, entertainment, cinemas and restaurants, to make a resurgence. In particular, the Winter Olympics in Beijing in 2022 will boost sportswear and "health conscious" spending. But in general, Credit Suisse's analysts see this highly identifiable phenomenon of "China Pride" across the board – in infant formula, cosmetics and technology items, as well as in areas such as new energy vehicles and automobiles.

Sectors to watch

In the auto sector, China is expected to reduce its reliance on imported goods such as high-end luxury cars, pushing Chinese auto makers to establish high-end domestic auto brands that leverage the country's leadership in new energy and intelligent vehicle technologies, according to Bin Wang, Co- Head of APAC Autos Securities Research, Credit Suisse.

China's dominant position in electric vehicles is gathering pace, fomented by a rapidly evolving support sector. Battery prices continue to decline. Concurrently, the infrastructure to support electric vehicles, such as charging stations, are proliferating, while the rise of new entrants creates greater choices at different price points for domestic consumers.

"For the first quarter of 2021, Chinese local brands' new energy vehicles (NEV) accounted for 75.5% of total China NEV sales volume, reflecting consumer preference for Chinese branded vehicles," Mr. Wang said.

In the consumer sector, strong digital and marketing capabilities as well as a nimbleness to respond to consumers' changing needs, have led to strong momentum for domestic brands in sportswear, color cosmetics, skincare and infant milk formula, which have the potential to further increase market share.

Another factor contributing to "China Pride" as a long-term investment trend is that despite strong growth in the aforementioned sectors, Chinese brands are still underpenetrated when compared with the overall size of the market, with room for upside, according to Jesalyn Wong, China Consumer Analyst, Securities Research, Credit Suisse.

Strong and broad research coverage capabilities

Credit Suisse has one of the most comprehensive and highly recognized China Research coverage capabilities. The Credit Suisse Equity Research team covers more than 460 Chinese-listed stocks, including about 216 domestic A-shares, which represent over 70% of the CSI-300 index constituents by market capitalization. In addition, the HOLT platform covers close to 2,100 A-share companies and more than 3,000 stocks across Hong Kong and mainland China.