The pet industry continues to have a high vision, and domestic products are expected to break through

Under the influence of the epidemic, pet consumption has demonstrated resilience and maintained a rapid growth momentum. We believe that trends such as channel reform and consumption upgrading are expected to bring development opportunities to local enterprises, and domestic product leaders who are deeply engaged in product research and development, brand value, and channel expansion are expected to emerge.

The pet industry continues to have a high landscape and broad growth space. According to Frost&Sullivan, it is estimated that the market size of China's pet industry will reach 268.6 billion yuan in 2021, with a compound growth rate of 19.1% from 2015 to 2021; It is expected to reach 496.6 billion yuan in 2025, with a compound growth rate of 16.6% from 2021-2025. Among them, pet food, pet supplies, pet medical care and services accounted for 39%, 14% and 34% respectively, and the compound growth rate from 2021-2025 was 14.8%, 14.1% and 19.8% respectively. In terms of quantity and price, on the one hand, compared with the United States and other countries, China's family pet raising rate still has much room for improvement, and the aging population is expected to catalyze the demand for pet keeping and companionship, driving the increase of pet raising rate; On the other hand, with the subsequent upgrading of consumption quality and the increase of consumption types, the amount of single pet consumption has great growth potential.

In addition, short-term RMB depreciation has thickened the performance of export enterprises. Pet consumption has emotional attributes, and the demand is relatively flexible. Under the influence of the epidemic, pet consumption still achieved a rapid growth. During the "618" period in 2022, pet category sales of all platforms performed well, driving the sales of Tmall+JD pet category in June to grow significantly year on year. At the same time, the export income of domestic listed pet enterprises accounts for a relatively high proportion. The recent devaluation of the RMB is expected to increase their exchange earnings and improve their profitability.

To sum up, channel reform, consumption upgrading and the rise of domestic products are the medium and long-term trends of the pet industry. First, in terms of channel change, the online penetration rate of pet consumption has continued to increase, and content platforms and social e-commerce have helped to effectively channel and transform. At this stage, domestic and foreign brands have launched new media marketing through platforms such as Tiktok and Kwai. We believe that companies with advantages in online and offline multi-channel layout and content marketing are expected to seize market share. Second, from the perspective of consumption upgrading, with the upgrading of pet care concept, pet products have been upgraded to diversification, refinement and high-end, which puts forward higher requirements for market insight, product iteration, supply chain stability and efficiency of pet enterprises; At the same time, the type of pet consumption has gradually evolved from the survival consumption that meets basic food and clothing to the quality consumption that pursues health, interesting interaction and refined life, bringing medical care, services and emerging track growth opportunities. Third, domestic products are expected to speed up their breakthrough. On the product side, local enterprises continue to improve quality, promote product differentiation and segment track innovation; On the marketing side, new media content marketing such as short videos is added, and further enrich the connotation of brand culture; Channel end, online and offline multi-channel integration layout, focusing on online high growth channels. At the same time, domestic enterprises have launched an entry into the medium and high-end market, and grasped the high-end trend dividend by acting as agents, acquiring overseas brands or launching more high-end product lines.

However, there are also some risk factors in the industry. First, industry competition has intensified. At present, there are many domestic manufacturers of pet food and pet products, with low market concentration, and there are many small and medium-sized enterprises in the industry. With the continuous expansion of the pet industry market, the market competition has become increasingly fierce. If the company cannot form core competitive advantages in products, brands, manufacturing, marketing and other aspects, it may face the risk of customer resource loss and market share decline. Second, the consumption level of residents has declined. Pet consumption is greatly affected by residents' consumption level. If affected by domestic and foreign macro-economy, repeated COVID-19 epidemic and other factors, residents' consumption will decline, which will be detrimental to the scale growth of the pet industry. If the company cannot improve its product development and market expansion capabilities, it may face the risk of overcapacity. Third, the price of raw materials fluctuated significantly. In recent years, the prices of raw materials for pet food and pet products, such as meat, grain, oil and fluff pulp, have fluctuated to varying degrees in the domestic and international markets. If the prices of raw materials rise sharply, the company cannot establish a good temporary price negotiation mechanism and raise the product prices in time, it may face the risk of declining profits. Fourth, the exchange rate fluctuated significantly. As the overseas pet market is relatively mature and large in scale, domestic pet industry related enterprises mainly focus on export business in the international market, so overseas income accounts for a relatively high proportion. The fluctuation of the RMB exchange rate will affect the competitiveness of relevant products in overseas markets and the company's exchange gains and losses, and thus affect the company's net profit (from Pets: Changpo Heavy Snow High Prosperity, Chinese Products Accelerated Breakthrough).