Merrill Lynch issued a Research Report, looking at the outlook for China's domestic demand Industry before 2025, considering policies and other factors.

The report states that Bank of America Securities has a basic expectation of implementing progressive and targeted consumer stimulus measures in 2025, but does not rule out the introduction of stronger policies under economic and geopolitical pressure.

Given the gradual nature of the stimulus policies, the post-cycle characteristics of consumption, and the backdrop of the most severe downturn in 30 years, it is expected that the EPS of domestic demand stocks may further decline in the short term, with the first quarter likely to be weak. However, the market may shift its focus to policy and the sprouts of recovery. The firm believes that the second half of 2025 may be a key time window.

Bank of America Securities stated that the expected PE for the domestic demand industry is 13 times, between the historical low of 11.3 times in mid-September 2024 and the high of about 15 times over the past 12 months. Considering the downgrade of EPS and the noise from the USA/China, the firm expects the trade to fluctuate within a range but to be supported by downward protection from policy or policy expectations. Once EPS corrections stabilize and/or policies start to take effect, the median will rise slightly.

Additionally, the firm believes that the fundamentals and stock prices of domestic demand stocks in 2024 have been impacted by "4D" (demand, inflation, destocking, and de-integration). Although pressures persist, considering the base effect and the efforts of companies (such as strict cost control), some domestic demand enterprises are expected to recover. Among them, despite cyclical factors, structural growth still exists in industries with unique demand (health, outdoor activities, experiences, personal interests, etc.) or supply-side dynamics.

The firm added that a continued focus on cash flow and shareholder returns may extend until 2025, with corporate actions possibly including increasing dividends, guaranteeing a dividend floor, and more buybacks.

Overall, Bank of America Securities has reduced the EPS forecast for domestic demand stocks for 2024 and 2025 by 4% and 1%, respectively, while raising the average Target Price of the 16 stocks it covers by 6%. Notably, the rating for CHINA FEIHE has been raised from "Neutral" to "Buy", with a preference for defensive stocks but a bearish outlook on Baijiu(Chinese Liquor) stocks.

Editor/lambor