We observe a clear consumption recovery trend despite a short-term moderation and believe the recovery trajectory in 2H20 is intact. Sporadic virus outbreaks may concern investors about potential disruptions, but improved testing infrastructure and concerted administrative measures can contain contamination quickly. If no significant disruptions, consumption is set to continue improving into the upcoming long national holidays.

1H20 results overall are quite good, taking into account the virus outbreak earlier this year. We witnessed slightly more beats than misses for earnings results. Our outlook survey revealed that about half the 57 subsectors have already fully recovered to pre-pandemic levels in terms of revenue and net margin, with 20-25% subsectors to full recovery in 3Q/4Q20. It also revealed that recovery would continue into 2H20. The top 3 downside risks of concern to companies are “weak demand” (53%), “cost pressure” (11%) and “geopolitical risk” (11%).

We maintain our index targets for MSCI China, HSI and CSI300 at 110/28,500/ 5,500, with 11%/15%/15% potential upside, respectively, and select a few stocks for the upcoming holidays. We see positive momentum on domestic air traffic recovery, with global flights to gradually improve on easing policy, with CSA and SHIA as top picks. CDFG is the key beneficiary of structural growth in China’s duty-free market, with Tongcheng-eLong to benefit from a domestic travel recovery. We expect auto-makers' production and wholesales to further accelerate, triggering further upward earnings revisions, with NIO and Geely as top picks. Dairy names, such as Mengniu and Yili, will likely continue to gain from solid demand and improving competitive dynamics into 2H20, with Mengniu as our top pick. Midea continues to gain share in the air-con market, ready to catch up on a demand recovery, stimulus policy and inventory normalisation. Yanghe is a good proxy for the sub-premium/mass-market baijiu segment to see solid demand improvements. Please also see our reports: China back to spend: Not yet on full speed; China back to spend 2: Recovery in better shape; China Market Strategy: Expect more upside despite market volatility.