China’s Consumer-Focused Firms Face Varying Risks as Demand Weakens

Fitch Ratings expects weaker demand to weigh on China’s consumption-oriented companies in 2022, but the impact on credit metrics will vary considerably across different segments.

We expect economic momentum to improve in 2H22, but consumer demand growth will likely remain weak, despite enhanced policy support. Stringent control measures in response to recent outbreaks of Covid-19, coupled with regulatory tightening in the education, technology and property sectors, pushed the urban unemployment rate to 5.8% in March 2022, the highest since May 2020 during the first wave of the pandemic in China.

Negative wealth effects will also dampen demand. Chinese households’ exposure to property assets has increased in recent years and the drop in house prices that we anticipate in 2022 will weigh on consumer sentiment.

Among retail segments, essentials should be relatively resilient but catering and discretionary categories, including autos, apparel and cosmetics, could see demand weakening for longer than in 2020 even beyond the immediate impact of Covid-19 controls.

Sustained pandemic-related restrictions will weigh on the credit metrics of companies like Vipshop Holdings Limited (BBB+/Negative) and Haidilao International Holding Ltd. (BBB-/Stable) that have greater exposure to more vulnerable segments, though Haidilao should be able to cut capex, reducing cash outflow. Meituan (BBB-/Negative) may see weaker contributions from in-store operations and higher operational costs partly offset by stronger online and delivery operations.

Among auto dealers, China Grand Automotive Services Group Co., Ltd. (B-/Negative) may prove more vulnerable to the temporary downturn in sales than Zhongsheng Group Holdings Limited (BBB-/Positive), which has stronger liquidity and more exposure to the resilient luxury segment.
Source: Fitch Ratings