As of November 5, the Shanghai Composite Index has fallen by 0.34% this year, and the ChiNext Index has risen by 8.92%. However, many consumer ETF funds have negative returns, reflecting the overall sluggish consumer sector.

(Producer/Author: Industrial Securities, Liu Jiaren, Xiong Chao)

. The impact of the epidemic has gradually weakened and common prosperity has been promoted. Consumption is expected to bottom out and rebound

.1. Since the epidemic, the domestic consumer market has continued to be sluggish. Must-choice consumption is better than optional consumption

This year, the performance of major consumer stocks is significantly weaker than market . As of November 5, the Shanghai Composite Index has fallen by 0.34% this year, and the ChiNext Index has risen by 8.92%, but many consumer ETF funds have negative returns, reflecting the overall sluggish consumer sector. Among them, among the 28 industries of Shenwan , the household appliance industry fell 24.85% this year, ranking 28th, and the agriculture, forestry, animal husbandry, fishery, food and beverage, leisure service industries fell 13.34%/12.44%/17.29% respectively, ranking 23/22/25th. The consumer sectors all underperformed the market, on the one hand, because of the excessive increase last year, and on the other hand, because of the continued weakening of consumption fundamentals under the influence of multiple factors.

multiple sets of data prove that the domestic consumer market is sluggish and the must-choice consumption is relatively strong. 1) Data 1: Since 2010, the monthly growth rate of my country's total retail sales has continued to decline, but since the epidemic at the beginning of 2020, the growth rate of retail sales has always been below the trend line, indicating that the domestic consumer market has always been weaker than normal after the epidemic; Data 2: The growth rate of industrial added value has recovered to a level of around 5% in 2019, but the growth rate of retail sales has declined from high single-digit growth to low single-digit growth, and has not yet fully recovered; Data 3: Since the beginning of this year, the gap between PPI and CPI has widened, reaching 10.0% in September, hitting a new high in the past five years, which means that although the cost of upstream raw materials has increased significantly, manufacturers cannot pass it on to consumers through price increases, proving that terminal consumption is abnormally sluggish. 2) Classification: the necessary consumption represented by grain, oil, food, daily necessities, etc. recovers faster and more stable, while the optional consumption represented by cosmetics, gold, silver, jewelry, sports and entertainment recovers relatively slowly, and has greater fluctuations.

.2. The epidemic has repeatedly affected short-term consumption, but the overall trend of epidemic prevention is positive

The direct reason for the sluggish consumption in the past two years is the repeated outbreak of the epidemic. From August last year to January this year, and from August to October this year, the epidemic has repeated many times, which directly led to the escalation of prevention and control measures in the short term, such as cancellation of cross-provincial travel in the place of the epidemic, restricting dining and dine-in in the restaurant, etc.

1) Reduced consumption capacity: The repeated epidemic will directly affect the recovery of industries such as catering, tourism, and film, thereby affecting the income of practitioners in these industries, resulting in the weakening of the consumption capacity of this group. Taking the tourism industry as an example, in 2019, the added value of tourism and related industries in the country reached 4.5 trillion yuan, accounting for 4.56% of GDP. The tourism industry directly employed 28.25 million people. In the past two years, the tourism industry has been bleak, and the income of employees has decreased, so the consumption capacity will naturally decline;

2) Consumption willingness is reduced: the repeated epidemic will deepen residents' sense of uncertainty about the future, especially reducing future income expectations, so it is more inclined to increase savings and reduce consumption willingness, which will affect the recovery of the domestic consumer market. With a multi-pronged approach, it is expected that the impact of the epidemic will gradually weaken. Unlike the loose epidemic prevention measures in most overseas countries, China has resolutely adopted strict epidemic prevention strategies since the beginning of the epidemic and has continued to this day. Therefore, the number of new crown vaccine in my country has exceeded 2.2 billion doses, and the number of people who have completed the full vaccination process has reached 1.067 billion, and the vaccination rate has also exceeded 70%.

.3. The gap between the rich and the poor has increased and affects consumption willingness, and the "common prosperity" policy has increased and the epidemic has increased the gap between the rich and the poor of our residents. In 2020, the Gini coefficient of Chinese residents' income was 0.468. Although it has decreased significantly from ten years ago, it is still in the range of too large a gap of 0.4-0.5, and it also rose slightly by 0.003 compared with 2019. Judging from the income data, the average growth rate of per capita disposable income of urban residents in my country since 2020 is significantly faster than the median , proving that the gap between the rich and the poor is further widening.According to the law of decreasing marginal consumption propensity for Keynes , the marginal consumption propensity for the rich is significantly lower than that of the poor. Therefore, when the income structure deteriorates and income growth mainly flows to a small number of high-income groups, and the consumption capacity of middle- and low-income people has not improved significantly, the consumption growth momentum will be suppressed, hindering the domestic circulation.

my country's income structure should transform from a "pyramid-shaped" to an "olive-shaped". According to data from my country Income Distribution Research Institute, in 2019, the proportion of groups with per capita monthly income of less than 1,000 yuan in my country was about 39%, the proportion of groups with an average monthly income of less than 1,000 yuan was about 30%, the proportion of groups with an average monthly income of 2,000 to 3,000 yuan was about 15%, the proportion of groups with an average monthly income of 3,000 to 5,000 yuan was about 11%, and the proportion of groups with an average monthly income of more than 5,000 yuan was about 5%, and the income was "pyramid-shaped". The 10th meeting of the Central Financial and Economic Commission on August 17 this year emphasized that in the future, the olive-shaped distribution structure with a large middle and small ends should be formed, and the proportion of middle-income groups should be increased. It mainly comes from the fact that the middle-income groups are an important force in promoting consumption expansion and quality improvement. The olive-shaped income structure is conducive to the expansion of the total consumption. The average consumption tendency of high-income groups is low, and the high-value consumer goods they purchase, such as luxury goods, is difficult to support the overall consumption growth, and their contribution to consumption is relatively limited. Although the average consumption tendency of low-income groups is high, the income level is low and large-scale effective demand cannot be formed; the middle-income groups are an important force in promoting consumption growth.

Common prosperity policy is strengthened. According to the above analysis, the widening gap between the rich and the poor affects the release of my country's consumption potential and the long-term decline in social retail growth. To this end, the 10th meeting of the Central Financial and Economic Commission clearly stated that the policy of common prosperity was strengthened. According to the above analysis, the widening gap between the rich and the poor affects the release of my country's consumption potential and the long-term decline in social retail growth. To this end, the 10th meeting of the Central Financial and Economic Commission clearly stated that

.4. Housing, medical care and education affect residents' consumption capacity. In recent years, restrictions have frequently issued

. Under the influence of housing, medical care and education expenditure, my country's residents' consumption capacity has declined and their consumption willingness has decreased, hindering the domestic circulation. In 2020, among the consumption expenditures of urban residents in my country, the proportion of expenditures in housing, health care, education, culture and entertainment (no separate education items) was 25.8%, 8.0%, and 9.6%, respectively, with a cumulative proportion of 43.4%. From 2017 to 2019, when the Engel coefficient was relatively high, education expenditure and health care expenditure were still significantly higher than that of developed countries in Japan and Europe and the United States. For example, in 2017, the number of in the five Nordic countries with higher welfare benefits was only 4%, while in my country it was more than 15%. During the COVID-19 pandemic, the suppression of housing, medical care and education has made residents more inclined to increase defensive deposits, thereby reducing consumer spending. Therefore, it is necessary to effectively unblock the domestic circulation of . It is imperative for the state to help the people solve housing, medical care and education problems.

High housing prices have always been the main factor that suppresses residents' willingness to consume. In 2019, the housing price-to-income ratio of the 50 cities in my country was about 12. In 2020, the housing price-to-income ratio of Beijing, Shanghai, Guangzhou and Shenzhen exceeded 30, ranking among the top in the world. Collecting down payments and subsequent mortgage expenditures has become the main reasons for curbing consumption of contemporary young people.

"House to live in, not speculation" has become an important direction in my country's real estate market. Since 2016, a number of major real estate regulation policies have been implemented, and we have adhered to the principle of "housing for living, not for speculation". Especially this year, many places have tightened second-hand housing loans and strictly regulated the operational behavior of second-hand housing agencies (for example, Shenzhen does not directly display the prices of second-hand housing); measures such as "multi-school zoning" have cooled down the housing in popular school districts (for example, Beijing Xicheng). Since the beginning of this year, the growth rate of second-hand housing in many places has slowed down significantly, and some popular second-hand school district housing has even dropped significantly. In addition, the pilot reform of real estate tax mentioned above will further implement the idea of ​​"housing for living, not speculation", emphasize the housing attributes and compress its financial attributes. "House to live in, not speculation" can not only reduce residents' current expenditure on real estate, but also reduce future expected expenditures, thereby reducing current savings and increasing current consumption, which is conducive to releasing consumption potential.

"Difficult and expensive to see a doctor" has always been one of the major people's livelihood issues, and it is also one of the main reasons why residents carry out preventive savings and reduce consumption . For example, according to the latest "National Health Education Book for Preventing Major Diseases" released by The Chinese Actuary Association , the average treatment cost for major serious diseases in China is between 100,000 and 300,000 yuan, and some serious diseases must reach 500,000 or even higher, and the most expensive cancer is also the most serious disease in my country.

In addition to establishing a medical insurance system with universal coverage, the country continues to promote reforms in the medical field and reduces medical costs through various means: 1) The two-ticket system will be implemented from 2017 to break the black hole in drug prices; 2) The pilot program of centralized procurement of drugs and medical devices will be implemented in 2019, and the scope of centralized procurement will be expanded from 2020, especially the addition of high-value medical consumables. At present, six rounds of centralized procurement have been carried out, and the average price of drugs and medical devices that have entered the centralized procurement range has dropped by more than 50%.

Today's parents not only need to spend a lot of money on their children's education, but also take up a lot of time and energy for parents to spare their work, and they are more likely to feel anxious in comparison. Influenced by the traditional East Asian culture, most families in our country would rather keep their food and food tight or even give up their jobs, and should devote themselves to their children's education and make local investments regardless of costs, which will inevitably affect the normal consumption expenditure of the family. For example, the labor participation rate of female in my country has dropped from 73.24% in 1990 to 59.8% in 2020, among which more and more full-time mothers are one of the main reasons.

The country has taken a number of strict measures to reduce the pressure on family education, including: 1) Kindergartens: In 2018, the policy stipulates that private kindergartens are not allowed to be listed. In 2020, the coverage rate of universal kindergarten (including public and private kindergartens) that charge childcare fees and accommodation fees at government guidance prices reached 84.74%. 2) Primary and Secondary Schools: The Regulations on the Implementation of the Civil Promotion Law in 2021 clearly stipulate that private primary and secondary schools in the compulsory education stage are non-profit, and many places no longer approve private primary and secondary schools. The proportion of private primary and secondary schools in Hunan, Sichuan and other places will be reduced to less than 5%; in addition, Shanghai and other places have begun to introduce the "Citizens Recruitment" policy. 3) K12 Off-campus training: In 2021, the "double reduction" policy stipulates that the compulsory education stage will not be allowed to conduct off-campus training on weekends, statutory holidays, and winter and summer vacations. In addition, the after-school service end time in primary and secondary schools is not earlier than half an hour after normal get off work, reducing parents' economic and time burden. In 2019, the K12 off-campus training market size reached 619.1 billion yuan. After the double reduction policy was introduced, Doushen Education announced that the original major language discipline services had completely shifted to non-disciplines. NetEase Youdao announced that it plans to divest K9 business by the end of 2021. New Oriental Online also announced that it would stop K9 subject off-campus training, and the industry scale is expected to shrink rapidly.

.5. The domestic consumer market is expected to bottom out and recover

The above paper discusses the certainty of the recovery of the domestic consumer market, namely: 1) With the increase in the vaccination rate, the strengthened vaccination and the smooth development of special drugs for the new crown, the short-term adverse impact of the epidemic on the domestic consumer market will gradually weaken; 2) The country attaches great importance to "common prosperity". After transforming the income structure of my country's residents from "pyramid-type" to "olive-type" through policies such as income distribution and taxation, it is expected to enhance residents' marginal consumption tendency and release consumption potential; 3) The impact of housing, medical care, and education is gradually being eliminated, and residents' consumption capacity and willingness to consume may be improved.

At the same time, we also believe that the recovery of the domestic consumer market is also necessary: ​​

Consumption plays a fundamental role in my country's economic development: because my country has previously regarded investment, consumption, import and export as the "three horses" to drive economic growth, and the 14th Five-Year Plan is to upgrade the expansion of domestic demand to a strategic basis. It reflects that with the rapid increase of per capita disposable income , the contribution of final consumption to GDP has increased to 56.02% in 2019.However, it should also be noted that the final consumption rate of developed countries such as Europe and the United States generally exceeds 70%, of which the United States and the United Kingdom even exceed 80%. Therefore, in the future, my country's economic development will continue to increase in its dependence on consumption, and expanding domestic demand and tapping the potential of the domestic consumer market will become a long-term focus of work;

After the growth rate of exports declines, consumption needs to shoulder the banner of economic growth: my country's rapid macroeconomic growth in the past two years has greatly benefited from strong exports. The prevention and control effect of major countries outside my country is not ideal, resulting in a significant decline in overseas supply chain efficiency. my country's first resumption of work and production just fills the gap in overseas supply chains. In addition, European and American countries directly found cash to residents to stimulate consumer demand, so my country's monthly export volume has achieved positive growth since June last year. From January to September this year, my country's cumulative exports of 2.4 trillion US dollars were exported from January to September this year. Yuan, a year-on-year increase of 33%, with a compound growth rate of 14.65% in the past two years, which is far higher than the average export growth rate before the epidemic and far higher than the overall GDP growth rate.

However, it should also be considered that it is an indisputable fact that my country's demographic dividend is exhausted and labor costs are rising. In addition, the trade protectionism of is becoming increasingly fierce. It is expected that after the overseas supply chain is restored, the situation of international trade in in my country will still be very serious. Therefore, in the context of expected decline in export growth in the future, investment and consumption must stand up to support economic growth. We expect that in the short term, the country may support the development of the green economy by innovating the monetary policy tool , thereby increasing infrastructure investment expenditures in the green economy and thus promoting economic growth. However, in the long run, after rapid industrialization and urbanization, it is unsustainable to drive economic growth by relying on high growth in infrastructure investment or real estate investment, and the recovery of domestic consumption is imperative.

.6. Judging from the development experience of overseas and Taiwan, my country's consumer industry development trend

So, what sub-tracks should be focused on after the domestic consumer industry recovers? We believe that we can refer to the development experience of developed countries and regions overseas, start from the background of low fertility, and explore possible future development trends of my country's consumer industry.

The total population in the country continued to grow steadily. In 2020, the year-on-year growth rate of the total population increased significantly, and the population growth rate slowed down in the past decade. According to the data from the Seventh Census, the total population of my country in 2020 was 1.41178 billion, an increase of 0.15% from 2019. The total population in 2020 increased by 72.06 million people compared with the Sixth Census in 2010, an increase of 5.38%, with an annual average growth rate of 0.53%, a decrease of 0.04 pct3002

The birth population continued to decline, and the proportion of "one elderly and one young" increased. The number of births in 2020 was 12 million, a decrease of 2.65 million from 2019. After the implementation of the universal two-child policy at the end of 2015, the number of newborns in 2016 was 17.86 million, reaching the peak in recent years. Subsequently, the number of newborns continued to decline. In 2020, the total population aged 0-14 was 253.38 million, accounting for 17.95%, +1.17pct compared to last year. The number of people over 65 years old is 190.64 million, accounting for 13.50%, +0.93pct compared to last year.

my country's population and birth rate have approached overseas developed countries. Judging from the natural growth rate and birth rate data of various countries, there are two types: 1) non-immigrant type, a relatively typical one is Japan, which has been in a negative population growth stage since 2007, with a birth rate below 8.7‰; 2) immigrant type, a relatively typical one is the UK, the United States, and the United States as a whole is in a relatively stable growth stage. (Report source: Future Think Tank)

. Cosmetics: As the supervision becomes stricter, leading brands enjoy market share increases

2.1. Supervision is stricter. The new cosmetics regulations affect short-term supply and thus affect the industry growth rate

" Cosmetics Supervision and Administration Regulations " and related measures and regulations have been issued one after another.The "Regulations on Supervision and Administration of Cosmetics" was officially promulgated on June 16, 2020 and implemented on January 1, 2021. The supporting measures "Regulations on Cosmetic Registration and Preparation Management", "Regulations on Cosmetics Label Management of Cosmetics Label Management ", and "Regulations on Supervision and Administration of Cosmetics Production and Administration " were issued on January 7, 2021, May 31, 2021, and August 2, 2021, respectively, gradually standardizing cosmetic production and operation activities, strengthening cosmetic supervision and management, ensuring the quality and safety of cosmetics, ensuring consumers' health, and promoting the healthy development of the cosmetics industry.

"Cosmetics Registration Management Measures" and relevant regulations will be implemented on May 1, and the filing speed has decreased since May. " Cosmetic Registration and Filing Management Measures " was released on January 12 and officially implemented on May 1. The "Cosmetic Classification Rules and Classification Catalog" was released on April 9 and officially implemented on May 1. From May 1, 2021, when cosmetic registrants and filing persons apply for special cosmetic registration or ordinary cosmetic filing, they should fill in the product classification code in accordance with the "Classification Rules". After the formal implementation of the cosmetics registration management measures, the filing speed has been reduced since the system is still in the debugging period for initial use, and the filing number has dropped from 90,000+ in April to less than 3,000 in July-September. The total number of registrations and the growth rate of cosmetics retail sales can be placed in the same time dimension. It is extremely relevant. The short-term slowdown in the industry's growth rate is partly related to the low number of registrations caused by the implementation of the cosmetics registration management measures.

new cosmetic regulations are implemented to eliminate non-compliant brands, which is beneficial to the top brands. Will the implementation of the new regulations lead to a decrease in the number of long-term filings? As the short-term filing system is debugged and the registration and filing parties gradually adapt to and streamline the filing and declaration steps, the number of filings is expected to increase. Considering that product quality is strictly regulated under the new regulations, and the requirements for brands and manufacturers that "should have a quality and safety officer with more than 5 years of experience" will inevitably eliminate non-compliant products, brands and manufacturers. It is expected that the overall registration number will still be less than before the implementation of the new regulations after the impact of the registration process is eliminated. In addition, the new regulations require that the declaration of efficacy should provide sufficient scientific basis, and products that do not have efficacy but use the so-called efficacy as a gimmick to clear out of the market. The reduction of non-compliant products will help improve the market share of leading brands that focus on product strength, especially those that have completed the performance verification and evaluation in advance.

New regulations may accelerate raw material approval, and raw material innovation will rise to the national strategic level, providing new opportunities for product research and development. According to the "Catalogue of Cosmetic Materials Used", there are a total of 8,972 raw materials in my country. Based on the 2016 "National Cosmetic Materials Dictionary", there are currently more than 22,600 raw materials available. Under the new cosmetics regulations, filing management methods for other new raw materials will surely mobilize the enthusiasm of domestic and foreign enterprises to innovate raw materials technology. At the same time, the raw material registrant/recordor complies with the risk management principle , be responsible for new cosmetics raw materials and bear corresponding legal responsibilities, or accelerate approval. Since the implementation of the new cosmetics regulations, 4 new cosmetic raw materials have been approved, injecting new vitality into cosmetic product innovation. The research and development and approval of more and more core raw materials are expected to become the key to cosmetics brands breaking through the underlying technology. Compliant companies, especially leading brands, are expected to gain new opportunities under the new regulations.

In summary, compliant brands that focus on product strength and brand strength will continue their rapid growth trend. Based on the supply perspective, the implementation of the new cosmetics regulations may reduce the overall registration number in the short term due to the debugging of the filing system and the adaptation of the registration party, and the growth rate of the industry slowed down in the short term. As the filing system is debugged and the registration party gradually adapts to the filing requirements, the influencing factors from the filing process will be gradually eliminated. In the long run, the new regulations will increase control over product quality, safety, and efficacy claims, which will eliminate non-compliant manufacturers and brands, and reduce the number of product registrations. However, brands that focus on product strength and brand strength are very focused on R&D, production and sales. First, their filing will be promoted normally, and the implementation of the new regulations will not restrict their development. Second, they are expected to increase their market share when demand remains unchanged. Third, the launch of new raw materials is expected to provide underlying technical support for their innovation.We believe that in the long run, compliant brands that focus on product strength and brand strength will continue their rapid growth trend.

2.2. Cosmetic demand is less affected

The per capita disposable income and per capita consumption expenditure of residents nationwide 21Q3 The growth rate declined slightly 1.26pct/0.73pct. Another core element that affects the development of the industry is demand. The market is worried that the slowdown in cosmetics growth is due to the weak consumption caused by the decline in revenue growth caused by the epidemic. By sorting out the quarterly growth rate and cumulative growth rate of per capita disposable income and consumption expenditure, it can be seen that since the second half of 2020, the growth rate of per capita disposable income has returned to the 7% level, increasing to 7.86% in 21Q2, and the growth rate in Q3 slightly declined to 6.6%. The per capita disposable income has rebounded significantly since Q3 2020. Consumer expenditure in 21Q3 slightly declined by 0.73pct compared with Q2, but the overall growth rate is still higher than the Q1 level. In terms of range, demand factors may be less than supply factors.

cosmetic consumption actually has the necessary attributes, and the demand is less affected. Although cosmetics are classified as optional consumer categories, skin care products account for a high proportion of cosmetics, and skin care products have the necessary attributes for maintenance. With the rise of consumers' awareness of beauty and the deepening of skin care awareness, the concept of using skin care products every day for maintenance has been deeply rooted in people's hearts. Therefore, the necessary attributes for cosmetics have gradually been strengthened. From the monthly growth rate, it can be seen that even if cosmetics are classified into optional consumption, during the impact period of the epidemic, the recovery of cosmetics is significantly better than the average level of optional consumption and required consumption, and the demand for cosmetics is less affected.

When the demand impact is small, the growth rate may be affected by price factors. Cosmetics have a service life of at least 3 months, and at the same time have the shelf life of up to 3 years, and naturally have the attributes of stocking up. When the epidemic causes the growth rate of revenue to decrease and the demand remains unabated, consumers will prefer discount purchases:

1) Choose channels with good discounts when necessary in daily life, such as purchasing through ① live broadcast room, ② duty-free channels, etc. The tax-free discounts in September and October are relatively strong and contribute to high sales. According to Haikou Customs data, from October 1 to 7, Haikou Customs supervised offshore duty-free shopping amount of 1.47 billion yuan, 2 million shopping items, and 180,000 shoppers, an increase of 66.9%, 136% and 61.6% year-on-year respectively. It can also be seen from the RPI data that the decline in cosmetics prices from July to September is more obvious than in the previous period. If the influence of price factors is excluded, the growth rate of cosmetics consumption is better than the growth rate of cosmetics retail sales.

2) Wait for the promotion of the market to centrally purchase. From July to September, there were fewer major promotions, with weak growth rate; the Double Eleven promotion was launched on October 20, and domestic brands with strong brand power performed better. Winona sales exceeded 700 million yuan in four hours, single-product special cream exceeded 200 million yuan, and sunscreen exceeded 100 million yuan; Quadi's sales exceeded 100 million yuan in one minute, and exceeded 300 million yuan in about two hours. Mibeier's pre-sale exceeded 58 million yuan on the first day, a year-on-year increase of 54 times. According to Magic Mirror data, as of October 31, 2021, Winona/Perroya sold 973/524 million yuan respectively, ranking 6/8 in the beauty and skin care section respectively. Verify the strong demand again.

In summary, cosmetic consumption has the necessary attributes, the demand is less affected, and the growth rate may be affected by price factors. Cosmetics have a service life of at least 3 months and have a shelf life of up to 3 years, so they are naturally stockpiling. When the epidemic causes the growth rate of revenue to decrease and the demand remains unabated, consumers will prefer discount purchases. 1) Buy through live broadcast channels or duty-free channels when necessary in daily life, and 2) Wait for centralized purchases during the big promotion period, resulting in a slowdown in growth from July to September.

2.3. The cosmetics industry has a strong logic, and the leading brand α highlights

Based on the above analysis, we believe that the short-term decline in the cosmetics industry's short-term growth rate is mainly due to the supply factors brought about by the implementation of the new cosmetics regulations, rather than the shrinking demand due to market concerns. The certainty of long-term and stable growth of the industry is still there. The market believes that weak demand has reduced β in the cosmetics industry, which provides opportunities for layout. So what kind of companies have long-term layout opportunities?

Top brand recognition and market share increase under the compliance environment.Under the new cosmetics regulations, the requirements for product quality control, efficacy evaluation and disorderly publicity of , the drug administration will inevitably eliminate non-compliant products and production capacity, and enhance consumers' rationality. In the current compliance environment, it is easier for leading brands such as Winona and Perchoa to promote compliance based on their existing efficacy evaluation results to gain consumer recognition, and enjoy the increase in concentration brought about by the elimination of long-tail brand.

The epidemic has brought new opportunities, the normalization of foreign investment discounts may cause damage to the brand image, and the upgrading of local brands has begun to show results.

The epidemic has caused hindered overseas sales. Foreign-funded groups have bet on the Chinese market and achieved performance growth through major promotions with tax channels and discounts with tax exempt channels, but may bring long-term damage to brand power. Double Eleven Promotion: The discount for small brown bottle essence is as low as 50% off, and the 50ml essence is about 323 yuan. It is also a duty-free channel promotion, and the discount for two bottles of 100ml small brown bottle essence is 998 yuan. The normalization of tax-free discounts and live broadcast discounts makes customers accustomed to the low price of brand celebrity products, or it may be difficult to accept their normal prices. The long-term may cause a decline in brand power, and the brand image of high-end will be damaged.

At the same time, the local brand price system is maintained, and price increases are achieved through product upgrades. The Winona Shumin series is only sold at 50% off on Double Eleven throughout the year, and the price system is relatively strong. At the same time, the company has increased the price of small special care from 68 yuan to 88 yuan/15ml, and has launched an upgraded version of the barrier special care cream 298/50ml (no discount throughout the year) and a high moisturizing and repair cream 298 yuan/50ml. The 2.0 version of Perchoa Ruby Essence/Double Anti-Agency Essence has been launched, and the price of Ruby Essence has been increased from 259 to 319 yuan/30ml. With the upgrade of product , Q3 Bettani/Perchoal achieved a high growth of 47.29%/20.71%. We are optimistic about the brand strength of leading domestic brands and continue to improve.

As we mentioned at the beginning of the year, it has entered the era of high-quality growth driven by national supervision. At this stage, the general growth pattern of various companies has weakened, the industry growth rate has declined slightly compared with the previous period, and companies in the industry have differentiated. We believe that 1. Enterprises that promote the establishment of industry standards; 2. Enterprises that participate in the establishment of industry standards; 3. Enterprises that establish standards for their own products/related categories have more advantages. On the one hand, they can promote compliance and develop stably under supervision, and on the other hand, they will help quickly occupy the minds of consumers and gain consumer recognition. It is expected that enterprises with the ability to set standards will further increase their market share in stable growth industries.

. Duty-free: The peak season is gradually coming, and the medium- and long-term certainty is still in

3.1. Short-term profit margin is under pressure. I am optimistic about the performance repair of Q4 peak season.

3.1.1, 21Q3. Affected by the epidemic, the profit margin declined. The epidemic has repeatedly overlapped with extreme weather such as typhoons and floods, which greatly affected Hainan's passenger flow and duty-free sales, and the month-on-month decline was significant: In July, August and September, Hainan's offshore duty-free sales were 3.662, 1.699, and 3.417 billion yuan, respectively, up 47%, down 45%, up 13%, respectively, and the number of shoppers was 62, 22, and 470,000, respectively, up 60%, down 20%, down 20%, down 20%, respectively. 50%, increase by 2%.

Hainan's short-term sales are under pressure, and discounts + taxes have caused China's China Free Trade Co., Ltd. to decline.21Q3, the company achieved operating income of 13.973 billion yuan, a year-on-year decrease of 11.73%; achieved net profit attributable to shareholders of 3.132 billion yuan, a year-on-year increase of 40.22%. In 2021Q3, the company achieved gross profit margin of 31.27%/year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year-on-year- In order to make up for the decline in sales caused by the epidemic, the company has increased its discounts, and the universality of the main categories of fragrance discounts have gradually increased from 85% off at the beginning of the year to 85% off on 3 items in July, 85% off on 3 items in August, 75% off on 3 items in August, and 75% off on 3 items in September;

2) Focus on tax channels, and it is expected that the proportion of tax channels will increase by a certain increase compared with the first half of the year. Since tax-paid/cross-border e-commerce taxation and superimposed tax channels are mainly fragrant products with low gross profit, the gross profit margin of tax channels is significantly lower than that of tax-free channels. Taking 2020 as an example, the gross profit margin of tax channels is 32.55%, while the tax-free channels are as high as 44.9%; (Report source: Future Think Tank)

3.1.2, Q4 The passenger flow structure changes and the peak season is coming, and the conversion rate increases

Q4 The temperature in Hainan is suitable, and the passenger flow mainly changes from summer parent-child to cold-avoiding vacation, and the peak tourist season will gradually arrive. Since September, the flights and passenger flows of the two major airports, Haikou and , Sanya, , have both rebounded significantly. We believe that compared with Hainan tourists in the summer, the proportion of parent-child tourists is higher, from Q4 to Q1 of the following year is the peak of vacation, and tourists' purchasing power is relatively stronger.

National Day sales exceeded expectations. According to Haikou Customs: 1) Overall sales indicators, during the National Day 2021, Hainan's total holiday sales reached 1.47 billion yuan, with an average daily sales reaching a new high of 210 million yuan, with 180,000 shoppers, and 2 million duty-free shopping achieved; 2) During the National Day 2021, the holiday shopping rate increased again, and the customer order price, the number of single purchases, and the unit price were basically the same as during the May Day 21 in 2021, and the shopping rate increased to 37.71%.

3.1.3. Hainan tax and first-machine rental reduction and exemption were officially implemented, significantly increasing performance

Hainan 15% income tax preferential was officially implemented: 1) It is clear that the sales of offshore duty-free goods are encouraged industries; 2) The company's 6 subsidiaries, including Sanya Neidian and Haidui Company, can enjoy a 15% corporate income tax preferential tax rate; 3) The policy will be implemented from January 1, 2020 to December 31, 2024. The profits contributed by the tax reduction and exemption for the whole year of 2020 and Q1-Q3 in 2021 will be reflected in the third quarter report, with an impact on the net profit attributable to shareholders of the parent. Capital Airport rental supplementary agreement was signed: The company's subsidiary and Capital Airport reached an agreement on operating expenses in the third contract year (February 11, 2020 to February 10, 2021) and signed a supplementary agreement. The operating expenses were adjusted to 283 million yuan, and the impact on net profit attributable to shareholders was 1.14 billion yuan. This tax reduction not only provides strong guarantees for the annual performance, but also contributes a deeper water storage pool to future performance.

3.2. The medium and long-term certainty is still there, and there are many potential catalysts

3.2.1. Sales

is expected to be 250 billion yuan in Hainan's offshore island duty-free sales in 2025. Hainan government has given a clear tax-free sales target: 1) In 2021, Hainan's duty-free sales will strive to exceed 60 billion yuan; 2) During the 14th Five-Year Plan, Hainan will attract 300 billion yuan of duty-free shopping. We believe that this target is relatively conservative. Referring to Haikou City's 2025 sales target, based on the current proportion, Hainan's overall sales in 2025 can reach 250 billion yuan.

outbound tourism is relaxed, and China Duty Free itself has a lot of room for improvement. market is worried that Hainan's offshore duty-free period will be affected to a certain extent after the outbound travel is opened. We believe that:

1) domestic passenger flow is still affected, and Hainan's passenger flow is still in a downward stage compared with normal conditions. If outbound travel is released, Hainan's tourism should improve;

2) China Duty Free has gained advantages in scale and its voice on the brand side has gradually expanded.Even if outbound travel is open, it still has advantages such as preferential prices, rich brands and SKUs, convenient online platforms, and relatively smaller epidemic risks. China Duty still has a strong competitive advantage;

3) The policy goal of attracting overseas consumption back remains unchanged, and China Duty has a large elastic space for all-round layout. After the opening of outbound travel, airport stores are expected to improve marginally, and the layout of overseas duty-free shops may contribute to the increase. In addition, the city's duty-free policy is also expected to be implemented.

4) The actual impact of opening up of outbound travel is limited. As for South Korea alone, foreigners' duty-free consumption remained at around 80% in 2019, and most of them have been made up for by direct mail and other means, and the marginal improvement after opening is limited.

3.2.2. The short-term ultra-high market share is maintained, and the medium- and long-term benchmark against South Korea and Hong Kong, China,

2020 The national market share of mid-2020 exceeded 92%. Although many duty-free merchants joined the Hainan offshore duty-free market, we believe that the market share of mid-2019 is expected to be considerable. Compared with South Korea, the top duty-free vendors still account for most of their sales. 1) In the early stage: Silla and Lotte's total market share changes are very limited; 2) In the medium stage: After 5 years of competition with limited licenses, China Duty Free's market share in Hainan's duty-free industry may refer to the situation of Lotte + Silla, which can total approximately 63.8%, and its leading position is stable; if the market share of the new world, which is also Samsung, will be more considerable, or it may exceed 80%.

Hong Kong, China, is recognized as the most successful free trade port in the world and is a reasonable reference object for the duty-free industry in the mature development stage of Hainan Free Trade Port. Compared with Hong Kong Hutchison Whampoa, China, the retail sales of Hutchison Whampoa Real Estate in 2018 were HK$49 billion, of which the sales of duty-free related categories were HK$45.4 billion. In order to eliminate the impact of low-end commodities on market share, we conducted a sensitivity analysis of the market share of Hutchison Whampoa Real Estate under different proportions of mid-to-high-end commodities, and found that even in the most extreme cases, Hutchison Whampoa is expected to account for as high as 18% of Hong Kong's market share.

3.2.3. Profitability: Under perfect competition, it may reach 15%

. Compared with Harbour City and other retailers under perfect competition, the final reasonable profit margin may reach 15%: 1) According to the proportion of the operating income of Harbour City Shopping Mall to the operating income of Hutchison Whampoa Real Estate, financial expenses are allocated. Assuming the income tax rate is 15%, the net profit margins will also be as high as 15.68%, 14.45%, and 18.02% respectively. Main reasons: ① Harbour City has ultra-high square footage; ② Scale effect will reduce the period rate; ③ The long-term construction of the property leads to a low depreciation rate.

benchmarks retailers under perfect competition: Since the biggest difference between duty-free shops and retailers is whether they have rent expenses, the net profit margin in the state of no rent is calculated. Assuming the income tax rate is 15%, the net profit margin of the four well-known retailers is about 15% in rent-free state (of which the premium retailer Francesca’s could reach 19% in 2014-2016). Although the four retailers are located in different regions (Hong Kong and the United States) and have structural differences in rental and labor costs, the net profit margin under the assumption state is about 15%, which means that the net profit margin under the own property model under the fully competitive state (such as China Duty Free) may reach the level of 15%.

3.2.4. There are many potential catalysts, and new stores may be gradually opened

In the medium and long term, China Duty Free has both growth and certainty, and there are many potential catalysts:

1) In the future, China Duty Free Hainan will have many new stores or new areas, and it is expected to introduce top luxury to strengthen consumers' mental occupation. In terms of core transportation hubs: ① Sanya Airport Duty Free Store 21H1 achieved sales of 489 million yuan, and the second phase of 5,000 square meters is expected to open on December 31; ② Meilan Airport Duty Free Store 21H1 achieved sales of 2.762 billion yuan, and the T2 terminal duty-free store is expected to open as the T2 terminal is put into use In terms of comprehensive duty-free projects, ③ The No. 2 site of Phase I, Haitang Bay, Sanya may open before 2023, and it is expected to introduce a heavy luxury brand; ④ The sales area of ​​the Haikou International Duty-free City project reaches 150,000 square meters, and may become Hainan's new business card after opening.

2) The company plans to be listed on the Hong Kong stock market. According to the prospectus, it will use capital operations to deepen the upstream supply chain and domestic and foreign market competitive advantages; explore overseas hot investment opportunities, expand the network of duty-free shops in Hong Kong and Macao and open overseas duty-free shops with the focus of Asian hot tourist destinations; specific projects are worth looking forward to.

. Tourism and catering: Re-talk about recovery, pay attention to new trends and new structures

4.1. Hotels: The impact of the epidemic is gradually deactivated, benefiting from structural upgrades and light assetization for a long time

Normally, the feedback on stock price will gradually deactivate unless there is a new impact beyond expectations. Looking back at the stock price of Shouyou Hotel in the past 20 years (because Shouyou Hotel has a strong β attribute, it is selected as a representative company), the epidemic began to break out and spread across the country from February to March 2020. The stock price fell significantly, and the valuation also hit a new low in the corresponding normal years. In the subsequent period, due to the rebound of the epidemic in many places in Beijing, many places in the north and Guangdong, the stock price has been adjusted, but the low points of the stock price for each adjustment have risen. This year, the epidemic began in Nanjing during the summer vacation, and the spread range, speed and impact exceeded expectations, and the stock price has undergone a significant adjustment.

The pattern of strong people always strong has been formed, and the long-term growth space is clear. The hotel industry is an industry with obvious first-mover advantages, scale and brand-driven. The domestic hotel market structure has been determined. The strong people continue to strengthen their leading competitive advantages through continuous investment in brand, traffic, procurement, operation management advantages and technology.

industry structure upgrade effectively hedges the impact of the slowdown in the future macroeconomic growth, and medium- and long-term high-end layout and overseas outbound will open up new growth points. The product structure of domestic hotels mainly based on the mid- and low-end products will continue to upgrade, which is expected to promote the overall RevPAR of the industry to maintain a good growth trend. As of 21Q2, the proportion of mid- and high-end rooms in Jinjiang/Shouyou/Huazhu was 59%/31%/47% respectively. Leading companies have begun to focus on the layout of the luxury hotel market through mergers and acquisitions and self-construction to create a full series of brand matrix. In a longer period of time, after the domestic market layout is mature, going overseas is worth looking forward to.

stores are sinking + store openings are speeding up, and scale advantages and diversification have formed favorable support. At present, the hotel industry in first- and second-tier cities is relatively mature and has limited expansion space. Third-tier and below cities are expected to enjoy the dual space of increasing incremental and chain rate improvement brought by urbanization. Leading companies enter the segmented track through a multi-brand strategy to solve the problem of close-range exit of stores under rapid expansion. The larger the scale, the more resources the franchisees and member resources are accumulated, and the stronger the brand is exposed, which will drive faster opening of stores and form a virtuous cycle. As of the end of 21Q3, Jinjiang/Shou Travel/Huazhu signed contracts with unopened stores of 5,149/1,838/2,788 respectively, maintaining a high position.

light asset transformation is accelerating, and the characteristics of high profit margin and growth are highlighted. Light assetization can smooth industry cycle fluctuations and bring higher profit margins and ROE. In 2019 (under normal operating conditions), Jinjiang/Shou Travel/Huazhu/Green’s net profit margins were 8.47%/11.06%/15.71%/40.10% respectively. Among them, Green Hotel, which is mainly light asset, has higher profit margins.

4.2. Catering: Based on chain, internal and external skills, the leading brands accelerated their scale expansion, and promoted the further increase of the industry chain rate. Affected by the food culture and relatively low entry thresholds in different regions, the catering industry has a relatively scattered competitive landscape, and the room for improvement in chain rate is greater than that of the hotel industry. In recent years, catering groups have continued to promote national layout, such as Haidilao, which has accelerated downturn, KFC, and Laoxiangji who has expanded to the front line. However, from the perspective of consumption habits, brand awareness, cost control, supply chain, etc., there are certain differences in different levels of markets, so there are higher requirements for the internal and external management capabilities of the enterprise.

internal: Reshaping the supply chain, and the trend of digital upgrades is significant. Overall, the digitalization of the catering industry is mainly concentrated in downstream stores and consumer terminals, that is, reducing front-end pressure and labor costs. The further optimization of the single-store model lies in supply chain management, extending the focus of digitalization to upstream procurement, processing and other links.For businesses with lower difficulty in supply chain, the higher the possibility of achieving full-chain digitalization. Take Helens as an example. Short business hours lead to a lower turnover rate and square footage efficiency than other chain businesses. However, because the ingredients required are simple and processing procedures, digital management is the leading position and the profit margin is relatively advantageous.

External: Change in marketing awareness, reconstructing brand potential. According to the research of Hong Cafe.com, in terms of marketing target deviation, the preference ratio of "establishing and maintaining brand image" ranks second, indicating that the interviewed restaurant companies have begun to weigh the direct diversion monetization and the establishment of brand potential. From the provincial perspective, the proportion of the top five stores has dropped from 35.6% in August 2020 to 32.2% in the same period this year, indicating that the store branches of catering brands are gradually decentralizing. For the consumer groups in the sinking market, the current content platform represented by Douyin can further tap the potential needs of long-tail users and form a social closed loop of "interest discovery-offline store exploration-online sharing", which is conducive to strengthening the brand effect.

4.3. Scenic spots & performing arts: the population structure has changed in multiple dimensions, and the supply side of cultural and tourism consumption has been upgraded again

Under the influence of the epidemic, the National Day tourism market ushered in a weak recovery. Looking back at the tourism market this year, it showed a rapid recovery trend after the Spring Festival, and passenger flow on May Day recovered to pre-epidemic levels for the first time and had a positive growth of 3.2%. Since June, epidemics have occurred in many places across the country, especially the Nanjing Delta virus spilled out to Zhangjiajie and spread rapidly, greatly affecting residents' willingness to travel, so the pace of rapid recovery has reversed. Judging from the passenger flow, the Dragon Boat Festival/Mid-Autumn Festival/Eleventh Day was 93%/84%/70% of the same period in 2019; while due to the current downward trend in the macro economy and the overall poor consumption environment, the recovery of tourism revenue still lags behind the number of tourists, and the Dragon Boat Festival/Mid-Autumn Festival/Eleventh Day was 75%/79%/60% of the same period in 2019.

The population structure has changed in multiple dimensions, and the rise of multi-level and personalized needs. In recent years, the domestic population structure has become aging, the family structure has become smaller, and the urban structure has become agglomerated, driving changes in the pattern of the consumer market. This change is reflected in the needs of two major sub-groups, namely silver-haired travel and parent-child travel. At present, the trend of tourism consumers extending from generation to generation to the elderly and young is becoming increasingly significant.

The silver hair people have strong consumption capacity and actively embrace new travel methods. The results of the seventh national census show that China's population aged 60 and above accounted for 18.7%, and most of the newly added elderly population was born in the second baby boom in the 1960s, with sufficient wealth accumulation and strong economic influence. The policy of

has been introduced to drive the growth of parent-child travel scale, and pay attention to the spillover effect of strong IP projects. From the perspective of travel structure, the proportion of second-child families in parent-child travel has increased from 18.1% in 2018 to 25.0% in 2020. This year, the government has successively introduced "three children" and "double reduction" policies, which is expected to further increase the customer base and travel time of parent-child travel. From the perspective of travel destinations, cities with natural and cultural landscapes and large theme parks are more popular. Referring to the spillover effect on the Shanghai tourism market after the opening of Shanghai Disneyland, we believe that the Beijing Universal Studios, which opened in September this year, has great potential for replicating this effect as an IP of the same level.

. Educational service: Under the structural contradictions of the employment market, the overall pressure on employment to stick to the leader and layout growth

is slowing down, but the youth group still needs to continue to pay attention. In September, the national urban surveyed unemployment rate was 4.9%, a month-on-month decrease of 0.2pct and a year-on-year decrease of 0.5pct, which has returned to the optimal level since 18 years, but there are structural contradictions: 1) The cost of upstream raw materials has risen, and the production side has been negatively affected, which has been further transmitted to the consumer side, so the uncertainty of future employment remains; 2) A series of regulatory policies such as real estate and education have caused great disturbances to some industries; 3) In particular, it can be seen that although the unemployment rate of the population aged 16-24 has decreased seasonally, it is significantly higher than before the epidemic. In May, the State Council Executive Meeting decided to extend the employment stabilization policy and determine measures to further support flexible employment.

Vocational Education: Policies strongly support, encourage social diversification of school management and set high-standard development goals.On October 12, the General Office of the CPC Central Committee and the State Council issued the "Opinions on Promoting the High-Quality Development of Modern Vocational Education", which firmly grasped the "different types and equal importance" of vocational education and general education, emphasizing that the enrollment scale of vocational undergraduate education in 2025 shall not be less than 10% of the enrollment scale of higher vocational education, and put forward a series of requirements in terms of enrollment channels, vocational and general integration, professional settings, and school-enterprise cooperation. At present, the proportion of vocational education in undergraduate stage is less than single digits. From the perspective of financial investment and school management purposes, the recipients of vocational education in the future are expected to be mainly private schools. On the one hand, accelerating the establishment of a vocational education college entrance examination system will expand the supply side; on the other hand, referring to the German education system, the supply of vocational education is highly matched with the demand for economic development, which will effectively weaken the prejudice against vocational education talents.

Flexible employment: the epidemic is accelerating penetration, and the industry concentration is expected to continue to increase. With the expansion of the scale of enterprises and the segmentation of general positions, labor costs have increased rigidly, but at the same time, the judgment of employment cycles is more accurate, allowing flexible use of labor to accelerate penetration and demand is gradually released. Currently, the domestic flexible employment CR3 is less than 10%. With each of them deepening their fields, the BC side has accumulated certain advantages, and the competitive landscape is expected to continue to be optimized.

. New consumption: The future has come, and it will be here

6.1. Cultivating diamonds: supply and demand coordinate to promote high growth in the industry

Cultivating diamonds is still on the eve of the outbreak and have high growth potential. The production of natural diamonds has been declining year by year. Cultivated diamonds will achieve partial replacement of natural diamonds in the consumer field, and cost optimization further consolidates the price advantage. It is expected that the retail price of cultivated diamonds in 20Q4 will only account for 35% of natural diamonds, a decrease of 30pct from 2017Q4. At the same time, the production process continues to improve, and the production technology of large carats and high-level rough diamonds has gradually matured. Reviewing India's import and export data over the past 20 years, each technological breakthrough can bring about a jumping growth in the industry scale. In 2018, the FTC included cultivation diamonds in the diamond classification, and in 2019, the GIA issued an appraisal certificate, and the industry standards and price system were gradually established.

The profit link of the industrial chain is in line with the smile curve, and the medium and short-term opportunities come from the upstream production end. Cultivating diamonds is similar to natural diamonds. The upstream and downstream producers and brands earn the highest profits, and the midstream processing link is a human-intensive industry. From the demand side, the cultivation of diamond brands at home and abroad is in its infancy, and consumer habits still need to be cultivated; from India's import and export data and rough diamond ex-factory prices, there is a steady upward trend. We believe that the market structure of supply and demand will continue, and upstream manufacturers are expected to maintain high performance growth.

6.2. Confinement center: The potential growth space is broad, the establishment of industry standards will help improve concentration

Confinement center has the characteristics of low frequency and high customer orders, and the improvement of consumption level and the change of care concepts will promote the development of the industry. Generally speaking, the consumption frequency of a single consumer is less than 3 times, and the interval is more than 1 year. According to iMedia Consulting, the average average customer unit price of Beijing/Shanghai/Hangzhou/Shenzhen confinement centers in 2019 was 68/65/56/55,000 yuan, which is positioned as a middle- and high-income group and is a functional consumption that focuses on services. Compared with the care of confinement nanny or family members, the services provided by confinement centers are more professional and comprehensive, and are becoming more and more popular with the new generation of parents.

China Taiwan confinement center market has developed and achieved a higher penetration rate after the decline in the number of births. The Taiwan Confinement Center in China has achieved rapid development in the past 10 years. Analyzing and comparing the differences and differences between the two places, we believe that the development opportunities of the mainland market lies in: 1) The decline in the birth population may be caused by the increase in the childbearing age of mothers. According to the results of the sixth census, the average childbearing age of first childbearing for women in my country has reached 26.8 years, and objectively more professional care services are needed; 2) The Taiwan Confinement Center in China is a medical service institution, and the industry standards and regulatory system are more sound. It is easier to achieve chainization in services from basic care, postpartum repair to infant care, and children's hospitals. However, opening confinement centers in mainland China does not require medical qualifications and lacks supervision. Therefore, most participants have disorderly management and industry standards are not systematic. The attention at the regulatory level in the future will be conducive to the concentration of market share.

6.3. Invisible orthodontic industry: low penetration, high growth, great development potential

The prevalence of malgamosis in China exceeds 70%, but the treatment rate and invisible orthodontic penetration rate are both low. As of 2020, the prevalence of malignant jaw deformity in China was as high as 74%, and 1 billion Chinese people had problems with malignant jaw deformity, while the treatment rate was only 0.3%, of which the number of cases of invisible orthodontics accounted for only 11%; compared with the United States, the treatment rate was 1.8%, and the proportion of invisible orthodontics reached 32%, which shows that my country's invisible orthodontics has a broad market space.

From the perspective of industry scale and growth rate, global invisible orthodontics is in a period of rapid development, and the Chinese market growth is leading the world. In 2020, the global stealth orthodontic market size reached 78.5 billion yuan, with a CAGR of 25.62% from 2015 to 2020, while the Chinese stealth orthodontic market size was 9.66 billion yuan, with a CAGR of 49.6% from 2015 to 2020.

6.3.1. Supply and demand resonance drives the rapid growth of the invisible orthodontic industry

Under the dual driving force of demand and supply, the invisible orthodontic penetration rate is expected to continue to increase: From the perspective of demand: 1) The invisible orthodontic solution is about 20,000-40,000 yuan per customer unit price. As the middle class in China grows, the payment capacity is enhanced. In 2018, the middle class in China (the annual disposable income of households was greater than 138,000 yuan) reached 400 million, an increase of more than 6 times compared with 2010. The increase in income allows this group to still have the energy to meet the needs of improving personal health and beauty after meeting basic living needs.

2) Residents' oral health awareness is increasing, but there is still a big gap compared to Europe and the United States. In recent years, the number of people who have been diagnosed and treated in Chinese stomatological hospitals increased from 26.95 million in 2014 to 44.98 million in 2019, with a compound growth rate of 11%. It can be seen that with the improvement of living standards, residents' oral health awareness has gradually increased; but the current proportion of people who have been diagnosed and treated is only about 3%, which is still very room for improvement compared with the rate of about 70% of the United States (sampling survey caliber) and it is expected that with the popular science education of oral hygiene in my country, oral problems including malgammar deformities will gradually be paid attention to by people.

3) Invisible orthodontics can not only improve facial structure, but also be more beautiful in the correction process than traditional orthodontics, which meets the patients' needs for love for beauty. Because it involves the balance and coordination of facial bones and maxillofacial neuromuscles, dental orthodontics also has a certain "beauty-loving attribute". Under the publicity of social media such as Xiaohongshu and Weibo, young people's awareness of invisible orthodontics has gradually increased, and beauty dentistry has become one of the largest pan-medical beauty projects with users.

supply: 1) The enrollment of oral medicine major has been expanded, and the serious shortage of dentist supply has been improved. At present, the number of dentists per million people in my country is far lower than that in developed countries, but as the number of colleges and universities opening stomatology majors increases year by year, the shortage of dentists is expected to improve;

2) Private oral medical service institutions are rapidly increasing, and self-media and other publicity calibers have increased, so that invisible orthodontics can quickly reach more consumers. ① With the continuous expansion of the oral medical market, plastic surgery institutions have begun to increase oral departments and provide related medical services, and community oral diagnosis and treatment institutions have also continued to increase. In 2015, there were more than 64,000 oral medical institutions in my country, and the growth rate was rapid. It is expected that the number of private oral medical institutions in 2025 will increase to 133,000. ② Patients who have successfully corrected malignant deformity can share the experience and effects of invisible orthodontics in self-media, so as to attract more patients to adopt invisible orthodontics.

3) Low threshold + high pricing + high efficiency = large profit margin, dentists have greater motivation to promote the use of invisible orthodontics. ① Compared with traditional orthodontics, invisible orthodontics is relatively difficult, and manufacturers such as Times Angels have equipped medical service teams to assist doctors in designing plans. Only relevant professional training is required, and general orthodontics can be treated; ② The degree of digitalization of invisible orthodontics is high, and doctors can reduce the operation of the correction process and improve the correction efficiency; ③ High efficiency diagnosis and treatment and high pricing determine that invisible orthodontics give doctors greater profit margins, so more dentists are motivated to recommend invisible orthodontics.

6.3.2. Invisible orthodontic industry chain: the gross profit margin of midstream manufacturers is as high as 70%, and the barrier is clear

Invisible orthodontic industry is the upstream of the invisible orthodontic industry, and the raw materials are monopolized by foreign manufacturers; the midstream is the manufacturer of invisible orthodontic device, and the barrier is relatively high; the downstream is the oral medical terminal. 1) Upstream: Most of the monopoly provided by diaphragm raw materials and diaphragm hot pressing equipment are monopoly provided by foreign manufacturers Shore and Aikot, with strong bargaining power, but the price is stable and there is a downward trend; 3D printers are mostly monopoly by domestic Liantai and other enterprises; 2) Middlestream: At present, the competitive landscape of domestic invisible orthodontic manufacturers is relatively clear, and the era of leading manufacturers, Aiqi Technology has competitive advantages such as technical barriers, data barriers, doctors and hospitals, and the gross profit margin is as high as 60%-70%; 3) Downstream: Oral medical service terminals mainly include public hospitals (comprehensive hospitals, dental hospitals), private chain oral institutions, medical beauty institutions, etc. (Report source: Future Think Tank)

6.4. Corneal resizing mirror: Myopia rate is high, Opcom Vision layout terminal creates the second growth curve

6.4.1. Myopia rate among adolescents is high, OK mirror is one of the best means to correct myopia

00. Myopia rate among children and adolescents in my country has increased year by year, and the problem of myopia is prominent. In recent years, the country has issued a number of policies to focus on myopia prevention and control, especially the launch of the "Guidelines for Myopia Prevention and Control in Youth" in 2018, which has made the myopia problem of adolescents pay attention to by governments and schools at all levels, and many places have carried out regular myopia screening and myopia correction related science popularization activities. As one of the best means of correcting myopia, the keratoimus reshaping mirror was written into the "Guidelines for Myopia Prevention and Control in Adolescents". In July this year, the "Single-to-Defense and Control of Myopia for Children and Adolescents" held by the Health Commission also recognized its myopia correction effect again. The industry has entered the fast lane of development and the penetration rate is expected to accelerate.

6.4.2. The industry barriers are clear, and OpcomShi has significant competitive advantages

Corneal resizing mirror field has clear competitive landscape and clear entry barriers. Currently, three domestic and seven imported brands have obtained product registration certificates approved by the State Food and Drug Administration. Although new market competitors have joined, it is difficult to obtain registration certificates for this type of medical device, the review cycle is several years long and the clinical application review standards are very strict, so the industry barriers are relatively high.

Compared with other manufacturers and potential competitors in the future, Opcom has the following competitive advantages: ① The first domestic manufacturer to obtain a registration certificate for corneal resizing lens products. It has been deeply engaged in the industry for more than ten years, and its marketing network is significantly better than new joiners. ② Based on years of operation, the company has accumulated a large amount of clinical use experience and data on products, and has advantages in technical research and development and production processes. ③As the first listed company in China for corneal resizing lenses, it has high brand recognition. ④ Compared with imported manufacturers, domestic manufacturers ship faster and after-sales service is more timely. ⑤ Product advantages: wide coverage and complete supporting products.

6.4.3. Past: Since its listing, the profit margin has gradually increased, and the company's operating income and net profit attributable to shareholders have grown rapidly since its listing, maintaining high gross profit margin and net profit margin. From 2016 to 2020, the compound growth rate of the company's operating income and net profit attributable to shareholders reached 119.39% and 117.56% respectively, stabilizing ultra-high growth rate; the company acquired downstream opto-visual terminals and launched high-end series lenses, and the gross profit margin steadily increased; the period fee rate increased due to the influence of its subsidiaries, but under the effect of scale, the net profit margin remained at a high level.

6.4.4. In the future: the fundraising will not exceed 2.042 billion yuan, the production line will be expanded, and the optical terminal will radiate across the country.

Company plans to raise no more than 2.042 billion yuan, for: ① Industrialization of contact lenses and supporting products: The project construction period is 2 years. After completion, OPCV production capacity will be further expanded and consolidate its leading position in the field of hard corneal resizing lenses; ② Community-based eye-view service terminal construction project: The project construction period is 5 years, and 1,348 eye-view service terminals will be laid out in Anhui, Jiangsu, Hubei, Shandong, Fujian, Shaanxi and other places.

Product side: According to the prospectus, it is expected that after the construction of contact lens and supporting product projects is completed and all reached production, the average annual sales revenue can be achieved of 844 million yuan and the net profit of 428 million yuan.It is planned to add 800,000 new hard breathable contact lens production capacity, 2 million bottles of lens care solution, 4 million bottles of lens rinsing solution, 2.4 million bottles of Jingteshu, and 8 million soft mirror products.

Optometry Terminal: The company has officially entered the medical service track, and the Optometry Center is expected to become the company's second growth curve. The company has built about 300 opto-visual service terminals in Anhui, Jiangsu and other places, and plans to build 1,348 opto-visual service terminals in the next five years. If a community-level optical terminal is deployed according to each community in each province, a total of 43,300 are required. The company plans to deploy 1,348 this time, and the proportion of the total number of communities is still small.

(This article is for reference only and does not represent any of our investment advice. If you need to use relevant information, please refer to the original text of the report.)

selected report source: [Future Think Tank]. Future Think Tank - Official Website