In a global recession BUY staples
Global experience, China implication
We have studied macroeconomic and retail sales statistics for Hong
Kong during the 1998 Asian Financial Crisis, 2003 SARS crisis and
2008-09 global financial tsunami. We also studied the performance of
the MSCI US, MSCI Staple and MSCI Discretionary Index in 2001, the
peak of 2007, and the 2008-09 recession. During economic downturns,
we found that: 1) F&B sales deteriorate slower than overall retail,
department store, apparel and footwear, jewelry, timepiece, and
automobile sales; 2) staples outperform discretionary stocks;
3) consumer stock price movement lags the index; and 4) the valuation
premium of staple/(discretionary) over the index widens/(narrows).
We remain positive on the China staple sector
We remain positive on China staples, given that: 1) staple companies’
sales performance remains defensive during economic turmoil;
2) weakening soft-commodity prices (pork, palm oil, sugar, PET resin,
pulp and petrochemical-based products) create a margin buffer to
absorb additional promotional expenses. Stock picks: BUY Tingyi (toppick)
for its diversified profile, brand equity, scale, proven track record
and solid financials. BUY Hengan for its focus on daily necessities, 70%
COGS exposure to declining commodity prices and solid growth profile.
BUY Want Want for its unique products, rural strategy and rice cost
management. BUY Mengniu for its faster-than-expected recovery story
and long-term industry dynamics. BUY Yurun for its sensible corporate
strategy and industry attractiveness. BUY UPC for its turnaround story in
the noodle business and edge in the tea business.
We are cautious on the China discretionary sector
We are cautious on China discretionary stocks, on the back of:
1) deteriorating operations (eg, both Parkson and NWDS’s SSS growth
slowed to 0-3% in December 2008 from mid-teen levels); and 2) further
operating margin erosion (the aggressive promotion and discounts are
able to stimulate sales but hurt the profitability of both store and brand
owners). We expect more negative than positive catalysts ahead. We
think the operators, who have diversified store locations and mid-end
customer segmentation, are less vulnerable.

Contents
What we learnt from Hong Kong and the US? .............................................................. 3
1) What happened to Hong Kong’s retail sales in the 1998 crisis, 2003 SARS and 2008 recession 3
2) What happened to the US stock market in 2001 9/11, the 2007 peak, and 2008 recession 5
What’s happening in China?.......................................................................................... 7
1) China’s growth to decelerate in 2009/10 7
2) Inland area outperforming the coastal area 9
What’s the implication to stocks? ................................................................................ 10
1) China staples: Positive 10
2) China department stores: Cautious 14
Valuation...................................................................................................................... 18
1) Consumer stock price movement lags the index 18
2) Staples to outperform discretionary 18
3) Staple premium over index to widen 18
4) Consumer P/E band and relative share performance 21
Investment risks........................................................................................................... 27
Devil’s advocate: Risks to our investment case 27
Food safety, diseases, and natural disasters 27
Government regulation 27
Operating environment changes 27
Volatility in raw material prices and exchange rate 27
Corporate governance 27
Appendices.................................................................................................................. 28
1. Department store location 28
2. Summary of 2008 earnings reporting days 32
Company updates ....................................................................................................... 33
Tingyi 34
Hengan Int’l 40
Want Want China Holdings 43
China Mengniu Dairy 48
China Yurun Food 53
Uni-President China 58