Consumer Focus
Mixed worry and hope
We continue to Overweight consumer staples. The possible announcement of
stimulus measures for the sector at the March National Peoples Congress (NPC)
meeting could be a short-term catalyst. Our top picks are Yurun and China Agri,
and we expect Mengniu and Tsingtao to be relative underperformers.
Table 1 : Key recommendation
Reuters Recom Price
(HK$)
Target
price
(HK$)
Upside/
(downside) to
target price
FY09F
PE (x)
FY10F
PE (x)
FY08F
PEG (x)
Yurun 1068.HK Buy 9.50 13.97 43% 13.6 10.8 0.8
China Agri 606.HK Buy 3.52 7.36 101% 4.8 3.9 2.6
Gome 493.HK Sell 1.12 0.62 -45% 7.4 7.2 0.3
Dynasty 828.HK Buy 1.17 1.44 20% 8.7 7.9 0.9
Lianhua 980.HK Buy 7.98 13.88 69% 10.6 8.4 0.7
Tingyi 322.HK Hold 8.34 9.30 10% 20.2 15.9 1.0
Tsingtao 168.HK Sell 14.58 12.46 -18% 19.0 15.1 1.2
Mengniu 2319.HK Sell 9.78 8.58 -16% 15.3 12.0 NM
Prices as at 12 February 2009
Source: ABN AMRO forecasts
We continue to Overweight consumer staples
We suggest investors rotate into defensive names ahead of the FY08 results in March/April.
China’s F&B sector has declined 2.5% in the past month, underperforming the MSCI China
index, which was up 0.4% over the period. The valuations of Chinese F&B stocks seem
attractive, averaging 11.6x FY09F PE, 9.5x FY10F PE and 2.4x FY09F PB, on our own and
Bloomberg estimates. Our top picks are Yurun (Buy, 43% upside potential) and China Agri
(Buy, 101% upside potential), on better earnings visibility and inexpensive valuations. We
expect Mengniu (Sell, 16% downside potential) and Tsingtao (Sell, 18% downside potential)
to underperform the market.
Possible stimulus measures could be a short-term catalyst
We expect the government to announce stimulus measures for the consumer sector at the
National People’s Congress (NPC) meeting in the middle of March, which could be a shortterm
catalyst. These measures might include the cancellation of consumption tax for alcohol,
cosmetics and other luxury goods, distribution of consumption coupons by local government,
and an increase in the exemption threshold for individual income tax. We would expect
breweries, Chinese hard liquor and wine makers, and also retailers, to benefit directly.
Worries about disposable income and consumption growth in FY09
Large-scale job losses in factories have seen farmers moving back to rural areas. Increasing
redundancies and salary cuts in urban areas will also affect disposable income growth and
consumption in FY09. However, the government’s various measures to promote domestic
consumption should have some positive effect, and we believe China’s economy will recover
ahead of the developed world, making us positive on China’s consumption growth in the
medium to long term. We suggest investors buy companies producing basic foods, since this
area should be impacted less by the economic slowdown than beverage and confectionary
will be.

Contents
Mixed worry and hope 3
We continue to Overweight consumer staples and suggest investors rotate into
defensive names ahead of FY08 results. Possible stimulus measures announced at
the March NPC meeting could be a short-term catalyst. Our top picks are Yurun and
China Agri.
3
We continue to Overweight consumer staples 3
Appendix 13
Company profiles 22
China Agri-Industries 22
China Mengniu Dairy 30
China Yurun Food Group 37
Tsingtao Brewery 44
2