New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Food for Thought</h2>
China Channel Checks
China is a key market for a number of New Zealand exporters and with activity in China recovering post peak COVID-19 impact it will continue to provide evolving insights on consumer preferences and behaviours. Early insights show sales channel mix and consumer behaviour trends have evolved and changes are likely to be enduring, in our view. Our recent industry discussions provide positive read through for the listed New Zealand food and beverage companies, with growing attraction for 'Brand NZ' and any products with perceived health benefits, although materiality differs depending on China exposure. Within our coverage a2 Milk (ATM), Scales (SCL), and Comvita (CVT) are best positioned to benefit.
Activity returning in China, with Government support for the consumer
Anecdotal feedback suggests that consumer activity is beginning to return in China and supply channels (outside of air freight) are now operating at 80%–90% capacity. Domestic last mile challenges still exist (not helped by some sub-distributor&nbsp;business failures from&nbsp;COVID-19), although the Chinese Government has signalled the intent to continue supporting food supply lines. Consumption represents c. 56% of China's&nbsp;GDP&nbsp;and we are already seeing an emphasis from policymakers on&nbsp;incentivising&nbsp;consumer spending,&nbsp;as illustrated by the lengthening of China's May Holiday.
Consumer behaviour and channel realignment
Lockdown policies have accelerated channel realignment trends, in particular towards online. Through January and February, online sales penetration lifted to 22% (from 17% prior). Digital brand interaction is vital for companies to maintain share gains, with a growing importance placed on live streaming and short videos. The food service channel was, unsurprisingly, the hardest hit through China's lockdown, and remains under material pressure post re-opening as consumers remain cautious. This channel is expected to be subdued for an extended period. From a New Zealand listed company context, China food service represents a very small portion of total global revenue exposure.​​​​​​​ Companies most exposed are Fonterra (FSF) and NZ King Salmon (NZK), although for NZK product re-alignment (to frozen and smoked) and redeployment of volumes to other markets likely lowers any sustained impact.
Brand New&nbsp;Zealand&nbsp;well placed in the eyes of the Chinese consumer
New&nbsp;Zealand's&nbsp;primary industry is well regarded globally for producing high quality exports and this is particularly true in China. Our recent channel checking suggests the positive perception by Chinese consumers remains strong and may be growing, helped by:
<ul type="disc">
<li>New&nbsp;Zealand's&nbsp;management of&nbsp;COVID-19: New Zealand has seen positive media on the ground in China for our strict&nbsp;lockdown&nbsp;and general handling of&nbsp;COVID-19, particularly relative to other nations. This has received a positive reception and further supports New&nbsp;Zealand's&nbsp;existing strong reputation for food quality.</li>
<li>Heightened awareness of&nbsp;health:&nbsp;Chinese consumer demand for health products is increasing with heightened emphasis on nutritional benefits of products, which supports a number of our export categories including dairy, fruit, honey and supplements.</li>
</ul>
Channel checking points to healthy demand from Chinese consumers for a number of our key export products including pet food, dairy, infant formula, skincare, vitamins/supplements, seafood, wine, fruit and&nbsp;Manuka&nbsp;honey.
Window&nbsp;of opportunity, but competition is coming
A window of opportunity exists for New&nbsp;Zealand&nbsp;food and beverage companies to gain additional market share in the near-term, with supply chains of fresh produce from other international markets (Europe and North America) highly disrupted. However, it is likely all global exporters will be looking to increase volume to China as its consumers are less restricted vs other markets which are in earlier stages of managing&nbsp;COVID-19. Inventory levels, particularly in fruit, wine and beef are already showing signs of rising which may put pressure on prices in future.
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255&nbsp;
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262&nbsp;
Matt Montgomerie matt.montgomerie@forsythbarr.co.nz +64 9 368 0124

Food for Thought
China Channel Checks
China is a key market for a number of New Zealand exporters and with activity in China recovering post peak COVID-19 impact it will continue to provide evolving insights on consumer preferences and behaviours. Early insights show sales channel mix and consumer behaviour trends have evolved and changes are likely to be enduring, in our view. Our recent industry discussions provide positive read through for the listed New Zealand food and beverage companies, with growing attraction for 'Brand NZ' and any products with perceived health benefits, although materiality differs depending on China exposure. Within our coverage a2 Milk (ATM), Scales (SCL), and Comvita (CVT) are best positioned to benefit.
Activity returning in China, with Government support for the consumer
Anecdotal feedback suggests that consumer activity is beginning to return in China and supply channels (outside of air freight) are now operating at 80%–90% capacity. Domestic last mile challenges still exist (not helped by some sub-distributor&nbsp;business failures from&nbsp;COVID-19), although the Chinese Government has signalled the intent to continue supporting food supply lines. Consumption represents c. 56% of China's&nbsp;GDP&nbsp;and we are already seeing an emphasis from policymakers on&nbsp;incentivising&nbsp;consumer spending,&nbsp;as illustrated by the lengthening of China's May Holiday.
Consumer behaviour and channel realignment
Lockdown policies have accelerated channel realignment trends, in particular towards online. Through January and February, online sales penetration lifted to 22% (from 17% prior). Digital brand interaction is vital for companies to maintain share gains, with a growing importance placed on live streaming and short videos. The food service channel was, unsurprisingly, the hardest hit through China's lockdown, and remains under material pressure post re-opening as consumers remain cautious. This channel is expected to be subdued for an extended period. From a New Zealand listed company context, China food service represents a very small portion of total global revenue exposure.​​​​​​​ Companies most exposed are Fonterra (FSF) and NZ King Salmon (NZK), although for NZK product re-alignment (to frozen and smoked) and redeployment of volumes to other markets likely lowers any sustained impact.
Brand New&nbsp;Zealand&nbsp;well placed in the eyes of the Chinese consumer
New&nbsp;Zealand's&nbsp;primary industry is well regarded globally for producing high quality exports and this is particularly true in China. Our recent channel checking suggests the positive perception by Chinese consumers remains strong and may be growing, helped by:

New&nbsp;Zealand's&nbsp;management of&nbsp;COVID-19: New Zealand has seen positive media on the ground in China for our strict&nbsp;lockdown&nbsp;and general handling of&nbsp;COVID-19, particularly relative to other nations. This has received a positive reception and further supports New&nbsp;Zealand's&nbsp;existing strong reputation for food quality.
Heightened awareness of&nbsp;health:&nbsp;Chinese consumer demand for health products is increasing with heightened emphasis on nutritional benefits of products, which supports a number of our export categories including dairy, fruit, honey and supplements.

Channel checking points to healthy demand from Chinese consumers for a number of our key export products including pet food, dairy, infant formula, skincare, vitamins/supplements, seafood, wine, fruit and&nbsp;Manuka&nbsp;honey.
Window&nbsp;of opportunity, but competition is coming
A window of opportunity exists for New&nbsp;Zealand&nbsp;food and beverage companies to gain additional market share in the near-term, with supply chains of fresh produce from other international markets (Europe and North America) highly disrupted. However, it is likely all global exporters will be looking to increase volume to China as its consumers are less restricted vs other markets which are in earlier stages of managing&nbsp;COVID-19. Inventory levels, particularly in fruit, wine and beef are already showing signs of rising which may put pressure on prices in future.
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255&nbsp;
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262&nbsp;
Matt Montgomerie matt.montgomerie@forsythbarr.co.nz +64 9 368 0124

A2 Milk Co Ltd

Food for Thought: China Channel Checks