The Zhitong Finance App learned that Huachuang Securities released a research report saying that the valuation score of leading food and beverage companies is currently at a low level in long-term history, and the return ratio of free cash flow is also at a historically high level. Looking at the medium to long term, the core competitiveness of excellent enterprises has not changed; on the contrary, they have cultivated and strengthened in the face of adversity, and they still have long-term growth potential. Sustainable free cash flow and continuous dividends are the foundation, switching from growth pricing to deterministic pricing. Free cash flow is a prerequisite for continuous dividends and helps promote valuation repair of high-quality leading companies. From a deterministic perspective, investors can obtain coupon returns, and can also enjoy growth options. From the perspective of current dividend rates, I recommend Yili (600887.SH), Wuliangye (000858.SZ), and focus on Shuanghui (000895.SZ), etc.

▍ The main views of Huacheng Securities are as follows:

What is the underlying logic of high dividends?

Based on “Pricing Paradigms in the Middle and Low Speed Era - Global Consumer Goods Leading Dividend Rates and Repurchase Implications” in December of last year, we went further from the perspective of free cash flow and studied the underlying pricing logic behind the high dividend style in more depth. The macroeconomic environment ranges from leveraged expansion to high-quality development, basic consumption from increment to inventory or even contraction, and leading companies gradually entering an era of medium- to low-speed growth, which will inevitably bring about changes in the pricing paradigm. From growth pricing to deterministic pricing, the core is the pursuit of sustainable free cash flow, and a dividend system based on this!

The business model in the medium to low speed era: downplay expansion and move towards free cash flow.

In the past, in the scale-oriented incremental economy, social actors tended to increase leverage, expand capital expenditure, pursue the scale of income, and even tolerate short-term losses. However, after moving towards an efficiency-oriented stock economy, enterprises tend to reduce unnecessary capital expenses and pursue stable cash flow management and real profit growth.

In this macro context, basic domestic consumer categories have experienced two rounds of growth dividend periods driven by “quantity” (from nothing, quantity) and “price” (from availability to excellence, quality). In recent years, the growth rate has declined, and has even entered a stage of no growth or negative growth. Moreover, leading enterprises are getting larger and larger. In the past, the business strategy of only pursuing rapid growth and rapid expansion of scale will inevitably shift to a stage of high-quality development that pursues more steady and sustainable management (ROE, free cash flow) and shareholder returns.

Food and beverage leaders have strengthened their free cash flow advantage.

It benefits from strong upstream and downstream bargaining from brands, high operational efficiency, and strong ability to create free cash flow for food and beverages. Even in terms of absolute volume, the average share of free cash flow for food and beverages in the entire market has increased from 1.4% to 10.5% in the past ten years, ranking fourth.

Liquor: The cash flow quality of leading liquors has improved, and volatility has decreased markedly. Looking horizontally, excellent liquor business models create strong cash flow, leading the way in the entire consumer industry; looking vertically, changes in the operating capital (OWC) of wine companies are often a priori indicator of changes in the industry cycle. From positive to negative, they indicate breaking out of the bottom of the industry (2009 and 16), while positive expansion indicates pressure transmission (12-15 years). At this stage, OWC has increased slightly, and the overall pressure on the industry is still in the transmission period, but the cash flow quality of leading brands has improved, volatility has decreased markedly, and resilience to risks has improved.

Popular products: From revenue oriented to profit oriented to cash oriented. In the incremental phase of the industry, companies are racing for ground, share is prioritized and profits are low, and capital expenditure (CAPEX) investment period is high; when the inventory stage pattern is clear, the corporate strategy first ranges from revenue expansion to profit improvement, then CAPEX reduces or even actively clears production capacity during the contraction phase, essentially from pursuing expansion to pursuing free cash flow. In the past, the dairy industry, soft drinks, beer, casual snacks, etc. have all experienced the transition from “looking at revenue” to “looking at profit,” and it is expected that in the future, more companies will “look at cash” in the assessment direction.

A shift in the pricing paradigm:

The core of dividends is a sustainable free cash flow and dividend system, which calls for increasing dividends and maximizing shareholder value under the new normal. Corresponding to the shift in the business model is a shift in the pricing paradigm. In the era of high growth, the PEG is greater than 1 or even PS paradigm focuses on growth pricing; while in the medium to low growth rate era, the dividend discount model is deterministic pricing. One is sustainable free cash flow (dividend prerequisite), and the other is corporate governance (dividend system). Most leading food and beverage companies have continuous cash flow capacity, and most leading cash return ratios are currently at historically high levels.

Looking at dividend intentions, the dividend rate has continued to rise over the past 15 years, the governance of state-owned enterprises has improved, and in addition to helping local economic and financial demands, private enterprise equity incentives are tied, and emphasis is placed on dividends under a market-based mechanism. At the same time, we call on more enterprises to be more careful about expanding ineffective production capacity under the new normal, pay more attention to fine management, establish long-term dividend or repurchase mechanisms, and maximize shareholder value.

Risk warning:

Macroeconomic slowdown; policy risks; terminal demand recovery falls short of expectations; industry competition intensifies; sector valuation center shifts downward.