Futu Securities released a research report stating that the current valuation of the food and beverage industry is low, mainly due to concerns about future cash flow and profit downgrades. Short-term market pessimism has had an impact on the industry. The rebound of the industry depends on the clearance of corporate performance risks, or the reversal of demand expectations. The latter depends on the positive efforts of macro-level fiscal and monetary policies or the verification of mid-term sales during peak season. However, from the perspective of the medium and long-term, assuming that there is no major systemic risk in demand, it is believed that the demand for food and beverages will have limited fluctuations, and the bottom of the industry's performance is relatively small compared to the current apparent performance decline. The investment strategy of the food and beverage industry in 2024 is low-valuation high-quality determined growth + high dividend rate, and the auxiliary line is operational improvement, focusing on the continued increase in stable policies and changes in risk preferences.

A-share industries with high cash flow and high ROE have stable valuation support, and 15x is the reference center. Under the steady-state low-growth conditions, dynamic PE = DCF/E1 = FCFR/(r-g). Therefore, it can be derived that the reasonable dynamic PE of most steady-state low-growth consumer industries is 12~15. For mature industry companies with steady-state low-growth , since the industry does not have expanding capacity, and the company has no large capital expenditures, the annual fixed asset investment only needs to cover the depreciation and amortization part, and the company's cash inflow is stable, so ideally the free cash flow ratio FCFR should be 1. Under the CAPM framework, assuming that the company's beta=1 and there is no financial leverage, it is required that the investment return rate r=rM, and the reference overseas average investment return rate is about 8~10% (such as S&P500). The company's long-term growth rate g is expected to be around 0~2% according to inflation expectations. Therefore, taking FCFR as 1 and r-g as 7~8% in the denominator, a reasonable dynamic PE of 12~15 is obtained.

The current valuation of the food and beverage industry is low, mainly due to concerns about future cash flow and profit downgrades. From the perspective of PEG and dividend yield, the valuation levels of various mature industries in A-shares are compared horizontally. The current 24PEs of baijiu (excluding Maotai) and the food sub-industry are only 12 and 16x respectively, corresponding to PEGs of less than 1x, and dividend yields of more than 4%, and their valuations are in a relatively discounted position; the 24PE of the drinks and dairy products sub-industry is 17x, which is in a relatively reasonable position; and the 24PEs of beer and condiments are 20 and 26x respectively, with a certain relative valuation premium. Valuation suppression mainly stems from market concerns about the downward pressure on future industry performance growth realization, factors such as weak income expectations, aging population acceleration, and rising product inventory, which have caused investors to generally worry that both quantity and price of the industry will be under pressure.

Referencing the performance of the Japanese food and beverage industry in the 1990s: steady and unrelenting, walking far and firm. Under the background of slowing economic growth and accelerating population aging, the revenue and dividend scale of leading companies in the food and beverage industry are still stable (the dividend rate has increased from about 36% to around 50%). The main reasons are: 1) Food and beverages are necessary consumer goods, and residents' expenditures are stable. The stability of zhongjia is better than that of quantity. 2) First-tier leading companies with brand, product, and channel advantages, consolidate their revenue scale through multiple product layouts, channel integration, and overseas expansion, and have the ability to resist risk. Second-tier leading companies have the opportunity to break through the market share by capturing the opportunities for innovative scenarios and incremental channels. In terms of stock market performance, the volatility of the Japanese food and beverage industry's stock prices in the 1990s was relatively mild, especially in years when the market fell, most of them were able to achieve relative returns. During the period, the valuation of the food and beverage industry fell with the market, and the industry’s relative PE mostly remained around 1x, and the lowest dropped to about 0.6x.

When will the industry bottom out? Adapting to the situation and steadily advancing. The current 24PE (16x) of the food and beverage industry in A-shares has approached a historical low point (the PE in early 2013 was 14x). Dongwu Securities believes that: short-term market pessimism has had an impact on the industry. The rebound of the industry depends on the clearance of corporate performance risks, or the reversal of demand expectations. The latter depends on the positive efforts of macro-level fiscal and monetary policies or the verification of mid-term sales during peak season. However, from the medium to long-term perspective, assuming that there is no major systemic risk in demand, it is believed that the demand for food and beverages will have limited fluctuations, and the bottom of the industry's performance is relatively small compared to the current apparent performance decline. The current year's PE has gradually entered the value range near 15x.

Investment advice: The main investment strategy for food and beverage in 2024 is undervalued high-quality assets with certain growth and high dividend yield. The secondary strategy is to focus on operational improvement and pay attention to the continuous addition of stable policies and changes in risk preferences. Under neutral hypothesis, volatility similar to 2022 is still present in 2024, and low-position layout is more rational. In the long run, the fundamentals of baijiu are strong and the target for market share increase is promising, but with a short-term expectation gap before the peak season. Recommending Shanxi Xinghuacun Fen Wine Factory, Anhui Gujing Distillery, Jiangsu King's Luck Brewery Joint-stock, Anhui Yingjia Distillery, and Hebei Hengshui Laobaigan Liquor, meanwhile, Kweichow Moutai, Wuliangye Yibin, Luzhou Laojiao and others are also worth paying attention to. For mass-produced goods focusing on cost and channel advantages, as well as some snack condiments, beer and other beverages, recommended companies include Beijing Yanjing Brewery, Chongqing Brewery, Tsingtao Brewery, Three Squirrels Inc., Yanker Shop Food, and Jinzai Food Group.

Risk warning: fluctuations in raw material costs, intensified industry competition risk, and food safety issues.