Fortune favours the leaders

While global peers under stress from weakening demand trade at an average PEG of

1.8, China’s F&B sector has fallen to an average PEG of 0.9, even as recent

consumption trends continue to support the structural growth story. Retail sales of food,

beverage and tobacco & liquor rose by more than 20% y-y in 1H08. This is not just

inflation at work — in 1H08, per capita disposable income of urban households and

rural households increased by 14.4% and 19.8% y-y in nominal terms, and by 6.3%

and 10.3% y-y in real terms, respectively. We are convinced that demand for staples

will hold up even as the cost of living rises and we believe that rising incomes and

urbanisation will continue to encourage consumers to upgrade to value-added and

higher-quality products. However, not all producers are going to be as happy as the

consumers seem to be, and many small players are closing shop as they lack the

scale economies to absorb rising input costs. We favour companies that enjoy

demonstrable pricing power (thanks to clear leadership in branded segments) and the

strength to survive industry consolidation (by leading it). Our picks on this basis are

Want Want, China Green and Huabao, all STRONG BUYs.