Debang Securities: Learning from Japan's "Lost Decade," Exploring the Growth Potential of China's Pet Food Industry

According to the Wisdom Financial APP, Debon Securities released a research report stating that the development of the Japanese pet food industry can be divided into two stages: in the early stage, the miniaturization of households and aging population helped increase the number of pets; in the later stage, the post-"Abenomics" macroeconomic recovery helped the industry move towards high-end development. The demographic changes in China are similar to those in Japan, with low penetration rates of pet ownership and pet food consumption compared to overseas, leaving ample room for growth in pet food expenditure. In the future, the Chinese pet food industry is expected to see both quantity and price increase. Additionally, foreign brands, having entered the market early, have a leading advantage in brand building and product reputation, while top domestic brands have great potential in consumer reach and product innovation.

Insight: Price increase drives volume growth, crossing the "lost thirty years". Looking back at the development of the Japanese pet food industry, the sector showed resilience during the economic downturn after the burst of the bubble. From a volume and price perspective, Debon Securities believes that the factors driving industry growth varied in different periods: early on, it relied mainly on the growth of pet numbers; later on, it benefited from the advancement towards high-end development.

Early driving force: Miniaturization of households and aging population boost pet number growth. Breaking down the volume and price, the initial growth in pet food circulation after the burst of the bubble was the core driver of the industry's continuous expansion, driven by the increase in pet ownership. With the trends of declining marriage rates and birth rates, Japanese households are becoming smaller in size, while the aging population is significant. Debon Securities believes that with the increasing proportion of singles, childless families, and elderly people, the demand for emotional companionship gradually grows, leading to a counter-cyclical growth in pet numbers during the economic downturn.

Later driving force: Post-"Abenomics" macroeconomic recovery helps the industry move towards high-end development. From a pricing perspective, the ton price of pet food has a strong positive correlation with the macroeconomic situation and CPI. At the end of 2012, after Shinzo Abe took office and accelerated the implementation of economic policies centered around the "three arrows", as the Japanese economy gradually recovered, the ton price of pet food continued to rise, leading the pet food industry towards high-end development. Debon Securities believes that the two main drivers of high-end development in pet food are "humanization" of pets and aging population.

Judgment: Promising prospects in the prosperity track, with long-term growth potential in both volume and price. Looking ahead, Debon Securities believes that the demographic changes in China are similar to those in Japan, with low penetration rates of pet ownership and pet food consumption compared to overseas, leaving ample room for growth in pet food expenditure in China, leading to both quantity and price increase in the future.

Volume: Growth in pet numbers and increase in pet food penetration jointly drive volume growth. Debon Securities believes that future growth in pet numbers will mainly depend on demographic changes. Similar to Japan after the 1990s, China is entering a stage of declining marriage and birth rates, smaller household sizes, and aging population, with the potential growth in demand for emotional companionship expected to drive an increase in pet numbers. Compared to overseas, there is still significant room for improvement in pet ownership penetration in China.

Price: Under the background of "humanization" of pets, refined feeding drives price increase. As pets gradually transition into "family members", "children", and "friends" within households, with the strengthening willingness of pet owners to spend, there is still room for growth in pet food prices. Compared to overseas, there is significant room for improvement in pet food expenditure per pet in China From the perspective of sub-categories, Debon Securities believes that: 1) The market for senior dog food and junior cat food may expand first; 2) Pet food with added probiotics is expected to achieve rapid growth in the future. By adjusting diet, the probability of pets developing various health risks into diseases can be reduced. This can not only promote the healthy growth of pets but also reduce medical expenses for pet owners.

Key companies: Enjoy the dividend of rising quantity, quality, and price, and grow together with the industry. Foreign brands, having entered the market earlier, have a leading advantage in brand building and product reputation, while top domestic brands have great potential in consumer reach and product innovation. Looking at the products of major listed companies, Debon Securities has identified the following 3 trends: 1) Diversification of categories; 2) High-end products; 3) Functional food + health products are being launched one after another. Debon Securities believes that excellent companies that accurately grasp industry development trends have promising prospects in the future. With the continuous improvement of product quality, palatability, and safety, high-quality products and the first-mover advantage of emerging channels will gradually form a moat, helping domestic brands to continuously break through and gain market share towards leading brands. It is recommended to pay attention to GuaiBao Pet, ZhongChong Shares, Petz Holdings, and LuSi Shares.

Risk warning: Macroeconomic fluctuations; sharp rise in raw material prices; food safety issues, etc