Valuations are attractive, but we should wait for earnings to bottom out; our top picks are Nongfu Spring, Anta Sports, and Guming.

Overview

This report argues that, despite highly attractive valuations in China’s consumer sector—around 16x forward P/E for essential consumption and approximately 13x for discretionary consumption—market sentiment remains subdued as earnings revisions have yet to bottom out. We recommend a selective approach, with a focus on stocks that face limited downside risk and are likely to see earnings stabilize relatively early. Our top picks include Nongfu Spring, ANTA Sports, and Guming Holdings, while we are initiating coverage of key names such as Miniso (overweight), Pop Mart (neutral), and Kweichow Moutai (neutral). At the same time, we maintain an underweight rating on Wuliangye Yibin and Yanghe Shares.

Core views

Macro and Valuation Perspective: The MSCI China Consumer Index’s weighting has declined from 40% at the end of 2020 to 29%, amid a roughly 50% pullback in share prices. Currently, forward P/E ratios for both consumer staples and discretionary consumption stand at approximately 16x and 13x, respectively—about 1.5 standard deviations below their 10-year averages. Valuations in subsectors such as beverages, beer, catering, and sportswear are at historical decile lows, with dividend yields ranging from 5% to 7%. However, consensus EPS estimates for 2026 remain under downward revision (–9% for staples and –7% for discretionary), primarily reflecting modest revenue headwinds and margin compression; thus, sustained re-rating will likely await a bottoming out of EPS revisions. Sector-Specific Insights: 1. Fresh‑Made Drinks (FMD): Price competition has eased, with leading brands shifting toward higher‑ASP products to support same‑store sales. Guming and Luckin Coffee are expected to expand their store networks by 51% and 31%, respectively, by 2027, while Mixue Ice Cream faces slower growth due to saturation in the low‑price segment. Coffee penetration still offers substantial room for expansion, and tea‑drink brands’ cross‑category moves into coffee present complementary rather than zero‑sum dynamics. 2. Ready‑to‑Drink Beverages (RTD): Sports drinks represent the fastest‑growing category (CAGR of 14.7% from 2019 to 2025), though competition is intensifying. High PET costs weigh on margins, with Nongfu Spring demonstrating resilience thanks to its diversified product mix and strong profitability profile. 3. Baijiu: The industry is navigating a triple cycle—macroeconomic conditions, supply‑demand dynamics, and policy shifts—and currently resides in the late stage of a downturn and the early phase of recovery. Stabilizing housing prices in first‑tier cities should help bolster household wealth confidence. Moutai has broadened its mass‑market appeal through DTC reforms, maintaining wholesale prices above RMB 1,600 and completing its de‑financialization. By contrast, Wuliangye, following a large‑scale accounting restatement that raised governance concerns, remains rated underweight. 4. Beer: With sales volumes maturing, growth drivers are pivoting toward premiumization and channel reallocation—from dine‑in to off‑premise consumption. China Resources Beer leads with an impressive 70% off‑premise share, giving it a structural advantage; Budweiser APAC faces a challenging transformation; meanwhile, Tsingtao Beer is benefiting from product innovation. 5. Trendy Toys and Retail: Pop Mart’s demand rests on neurobiological foundations, making it less susceptible to fleeting trends, and its overseas footprint holds significant upside potential (estimated 76%–4x). However, near‑term earnings momentum warrants close monitoring. Miniso has entered a “theme‑park‑ification” phase, with large flagship stores fueling growth and valuations appearing attractive.

Analysis framework

Institutional investors employ a hybrid top-down and bottom-up analytical framework. First, they assess the overall margin of safety for each sector by examining historical valuation percentiles and standard deviations; second, they monitor the magnitude of EPS revisions to identify signs that earnings have bottomed out. When selecting individual stocks, the focus is on “Operator Quality” rather than sector beta, with alpha‑generating opportunities screened using a fundamental scoring matrix that evaluates demand, supply, pricing, profitability, dividends, valuation, and portfolio holdings. For specific sectors—such as baijiu—cyclical overlay analysis (macroeconomic conditions, inventory levels, and policy factors) is applied; for retail, a Total Addressable Market (TAM) modeling approach is employed, leveraging population and GDP density to estimate overseas expansion potential; and for cost‑sensitive industries, sensitivity analyses are conducted to assess the impact of raw material price fluctuations.

Methodology notes

• Valuation MethodologyPE/PEG valuation

  We assess the valuation levels of consumer stocks using forward P/E and PEG ratios, benchmarking them against historical averages and their global peers.

  The research report assesses whether valuations are undervalued by measuring the degree to which the current P/E ratio deviates from its 10-year average—e.g., falling below 1.5 standard deviations—and employs the PEG ratio to evaluate the alignment between growth prospects and valuation, thereby helping investors identify high-quality growth stocks that have been unfairly sold off.

• Company Fundamentals and Financial FrameworkOthers

  EPS Revision Momentum Analysis

  It tracks the upward or downward trends in analysts’ forecasts for listed companies’ future earnings per share (EPS). The research report notes that only when the downward revision trend in EPS stalls and bottoms out does the stock price have a solid foundation for sustained revaluation—making this an important leading indicator for identifying optimal entry points.

• Industry/ Sector Analysis FrameworkSupply-and-Demand Framework

  Analysis of Channel Migration and Structural Transformation

  The analysis examines the structural shift in industries such as beer, from on-trade channels to off-trade channels. The research report notes that this shift has reshaped the competitive landscape, with companies boasting robust off-trade distribution networks—such as China Resources Beer—expected to enjoy a structural advantage.

• Industry/ Sector Analysis FrameworkPenetration Rate S-Curve

  Estimating the Ceiling for Coffee Category Penetration

  By comparing per capita coffee consumption in China and South Korea, the analysis concludes that China’s coffee market remains in its early stages, with substantial room for structural growth, thereby elucidating the business rationale behind tea‑brand entrants expanding into the coffee category.

• Industry/ Sector Analysis FrameworkOthers

  TAM: Total Addressable Market Estimation (based on population/GDP density)

  By dividing the number of existing stores by total population or GDP to derive a density metric, and benchmarking against the density levels in mature markets such as the United States and Japan, we estimate the global potential store count and growth multiples for retail brands like Pop Mart.

• Event-Based Game Theory and Behavioral FinanceOthers

  Neurobiological‑Driven Analysis of Consumer Demand

  From the perspectives of dopamine (anticipation), endorphins (sense of ownership), and oxytocin (social belonging), this analysis elucidates the addictive nature and repurchase dynamics of trendy toy blind boxes, demonstrating that their demand is rooted in long‑term structural trends rather than fleeting fads.

• The Cyclical and Economic Outlook FrameworkAnalysis of the Economic Turning Point

  Triple-Cycle Overlay Analysis of the Baijiu Industry

  We decompose the liquor industry’s performance into three cyclical components: the macroeconomic cycle (real estate/wealth), the supply-and-demand cycle (wholesale prices/inventory), and the policy cycle (e.g., alcohol bans). By drawing parallels with the 2012–2016 cycle, we assess the industry’s current position and the nature of its recovery—leaning toward an L-shaped rather than a V-shaped trajectory.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Nongfu Spring (9633.HK)

  Top-pick stock, benefiting from strong brand equity and margin resilience.

  Strengths

  A diversified product portfolio and an excellent profit-margin profile (with a net margin of 30% by 2025) make the company highly resilient to PET cost pressures.

  Weaknesses

  Competition in the sports drinks market is intensifying.

  Comparison

  Compared with Dongpeng Beverage and Nongfu Spring, Nongfu has stronger resilience to cost fluctuations.

  Risks

  PET prices remain persistently high, and intensifying competition is eroding market share.

• ANTA Sports (2020.HK)

  Top-pick stock, with a well-executed multi-brand portfolio.

  Strengths

  The multi-brand strategy has proven successful, with significant growth potential in overseas markets.

  Comparison

  Outperforms Li-Ning and Xtep within the sportswear sector.

  Risks

  Weak macroeconomic consumption and mounting inventory buildup.

• Guming Holdings (1364.HK)

  Top-pick stock: long-term growth trajectory and strengthening brand equity.

  Strengths

  The company is expanding its store network at a rapid pace—projected to grow by 51% by 2027—while maintaining strong penetration in lower-tier markets and broadening its product portfolio to include coffee and desserts.

  Comparison

  Compared with Mixue Ice Cream & Tea, Guming boasts greater growth potential in the mid-price segment; and compared with BaWang Cha Ji, it benefits from a larger base of existing stores.

  Risks

  Food safety concerns and heightened challenges in franchise management

• Pop Mart (9992.HK)

  Neutral rating; the long-term fundamentals remain intact, but the short-term timing is nuanced.

  Strengths

  Strong global IP management capabilities, a high member retention rate of 56%, and substantial room for overseas expansion.

  Weaknesses

  Short-term earnings volatility (with growth expected to decelerate in 2Q and 3Q) persists, despite a reduced reliance on top-tier IPs.

  Comparison

  Its valuation is higher than that of Miniso, but it enjoys a stronger brand premium and more robust IP barriers.

  Risks

  New IP launch failures, challenges in overseas execution, and geopolitical risks.

• Miniso (MNSO.US/9896.HK)

  Overweight rating, entering the “amusement park–ization” strategic phase

  Strengths

  Large flagship stores (Miniso Land) drive GMV, global IP monetization, and high dividends coupled with share buybacks.

  Weaknesses

  Investment in overseas directly operated stores is putting short-term pressure on profit margins.

  Comparison

  The valuation offers a 30% discount relative to Pop Mart, making it more cost-effective.

  Risks

  Store expansion has fallen short of expectations, and overseas macroeconomic headwinds persist.

• Kweichow Moutai (600519.SS)

  Neutral rating, with DTC reform serving as an anchor for early recovery.

  Strengths

  Three-layer moat (geography, brand, business model); DTC expands the customer base; pricing remains stable.

  Weaknesses

  A weak macroeconomic recovery caps valuation multiples, prompting a shift from high-beta cyclical sectors to consumption‑driven stocks.

  Comparison

  Compared with Wuliangye and Luzhou Laojiao, it boasts a more transparent governance structure and stronger risk resilience.

  Risks

  Weak high-end demand, the consumption tax hike, and the social responsibility burden on state-owned enterprises.

• Wuliangye (000858.SZ)

  Underweight rating; accounting restatements erode trust.

  Strengths

  Shareholder return commitments (dividends plus share buybacks) provide support at the bottom.

  Weaknesses

  Accounting restatements highlight inventory overhang issues, while the absence of a DTC catalyst akin to that of Moutai underscores a lack of governance premium.

  Comparison

  Valuation is above that of peers but lacks fundamental support.

  Risks

  Regulatory inquiries, sluggish channel inventory destocking, and a protracted process of rebuilding investor confidence.

• China Resources Beer (0291.HK)

  Overweight rating, benefiting from channel migration.

  Strengths

  Non-dining-in sales account for the highest share at 70%, premiumization is being executed effectively, and a diversified cost structure provides resilience against inflation.

  Comparison

  Compared with Budweiser APAC and Tsingtao Brewery, its channel structure is better aligned with current consumption trends.

  Risks

  Raw material cost inflation, weaker-than-expected summer sales, and intensifying competition in the premium segment.

Key data

• Changes in the Weighting of the MSCI China Consumer Index40% (end of 2020) → 29% (current)Reflects capital outflows and a decline in market capitalization.
• The downward revision幅度 of the 2026 EPS consensus estimateConsumer staples: -9%, Consumer discretionary: -7%Primarily driven by a 2–3% decline in revenue and margin compression.
• CAGR of the sports drinks sector, 2019–202514.7%Far exceeding the overall growth rate of the soft-drink market.
• Pop Mart’s global store count by the end of 2025630 companiesPotential global store footprint: 1,000–3,000 locations
• Stable Range for Moutai Feitian Wholesale Prices> Rmb 1,600The price spread between full cases and individual bottles has narrowed to approximately RMB 30, marking the completion of de-financialization.
• Non-dine-in sales share of China Resources Beer70%Among major beer producers, it stands at the highest level, benefiting from channel migration.

Impact & implications

The research report argues that, in the current macroeconomic environment, the investment rationale for the consumer sector has shifted from a “beta‑driven rebound” to an “alpha‑focused stock-picking” approach. Companies with strong brand moats, efficient operational capabilities, and well-defined international expansion strategies—such as Nongfu Spring, Anta, Guming, and Miniso—are poised to outperform. As for baijiu, although the cyclical trough has been reached, the recovery is expected to follow a gradual L‑shaped trajectory, requiring investors to exercise patience while waiting for the wealth effect to reemerge. Meanwhile, the ongoing channel restructuring in the beer industry presents long-term opportunities for companies like China Resources Beer—those with robust offline distribution networks—to expand their market share and enhance profitability.

Risks

• Macroeconomic recovery has fallen short of expectations, and the wealth effect among households is recovering slowly.
• Raw material costs—such as PET, aluminum, and barley—continue to rise, eroding profit margins.
• Intensified industry competition has reignited price wars, impacting ASPs and profit margins.
• Policy Risks: Potential increase in baijiu consumption tax or imposition of corporate social responsibility levies on state-owned enterprises.
• Geopolitical and regulatory risks are weighing on overseas expansion activities (e.g., Pop Mart, Miniso).
• Food safety incidents have dealt a blow to brand reputation.
• Climate change is impacting the performance of beer’s peak summer sales season.

What to watch

• The boost to beer sales from the June–July 2026 World Cup
• From the third quarter of 2026, the actual impact of cost inflation on beverage companies’ income statements
• Sales data for baijiu and gold jewelry during the Mid-Autumn Festival and National Day Golden Week
• Moutai’s DTC channel sales performance during the holiday period and the stability of its wholesale pricing.
• Further signals of stabilizing real estate prices in first-tier cities
• Operating efficiency and same-store sales growth of Pop Mart and Miniso’s new overseas stores
• The ramp-up performance of newly opened stores, such as those of Guming and Luckin Coffee, and the optimization of their store-level business models.