The Quiet Flow of Consumer Investment: Planting "Decades of certainty" in uncertainty

2025-07-14

Abstract:People's fundamental need for a better life will not change

In the first quarter of this year, at the internal business strategy conference of JD Capital, Kang Jiangbo, the managing director of the Consumer Investment Department, shared his insights on investing in China's consumer market. He noted that under the new normal of IPOs, the barriers to listing for consumer companies have risen. Our investment will focus on three key areas: leading enterprises with significant scale advantages, high-growth emerging champions, and companies with potential for mergers and acquisitions.

In terms of investment strategy, the rise of domestic brands and the upgrade of consumption remain our two main themes today. From a long-term perspective, as China's cultural influence grows and consumer companies become more capable, the rise of domestic brands will continue to develop. We firmly believe that people's desire for a better life remains unchanged, and the trend towards consumption upgrades is inevitable. The long-term direction is for high-quality products to be sold at reasonable prices.

However, in the face of the ever-changing market challenges, we will place greater emphasis on the long-term growth potential of companies. We will focus on those that can truly drive category breakthroughs, have the capability to expand their brands internationally, deeply engage in high-repurchase essential upgrade categories, and possess technological barriers. At the same time, we remain committed to the principle that a company must build a comprehensive capability matrix across product/brand, channel layout, and supply chain management to ensure true long-term competitiveness.

The following is a summary of Kang Jiangbo's speech on the spot:

Ⅰ. The new normal is a new paradigm of consumption and investment

Undoubtedly, we have entered the AI era today. In the context of the intense tech competition between China and the United States, consumer investment has seen an unprecedented decline. However, a key feature of the consumer industry is that in most niche sectors, the advancement of AI and technology will not replace the consumer sector. Even in an era of highly advanced AI technology, basic human needs such as food and daily life are unlikely to be entirely replaced by technology. Moreover, technological advancements may even allow people to devote more time and energy to consumption and enjoyment, gaining emotional value.

Therefore, in the foreseeable long cycle range, the margin of safety of the consumer industry is high enough and the risk is relatively low, which is also the biggest advantage of the consumer industry in the AI era. Therefore, we are optimistic about the consumer track in the long term, and at the same time, we continue to pay attention to various consumer segments that can bring significant improvement by using AI technology.

Compared with the impact of new technologies, in recent years, the market has more discussions on "new normal" for consumption investment: the listing threshold of consumer enterprises is constantly rising, and the investment in the consumer industry faces more severe exit challenges.

In this context, we believe that for consumer goods companies with substantial revenue and profit, strong brand power, and growth potential, IPOs will remain the preferred exit strategy. These companies typically boast profits in the hundreds of millions and revenues in the billions, maintaining a robust growth trend, and are expected to perform well in both the A-share and Hong Kong stock markets. Additionally, companies of medium size with significant growth potential, as well as those with technological attributes or innovative elements that transcend traditional consumption models, will also have opportunities for differentiated development. Conversely, companies with a certain scale and market barriers but limited growth potential or insufficient upward space may increasingly opt for exits through mergers and acquisitions.

In practice, whether through an IPO or a merger and acquisition exit, companies now face a longer cycle of scrutiny. Therefore, when screening projects, we prioritize the company's long-term growth potential. We not only assess its medium-term growth over 3-5 years but also its long-term sustainable development over a decade. Even if an exit is not immediately feasible after investment, we remain confident that such companies are worth our long-term commitment to their growth.

In addition, due to the high uncertainty of mergers and acquisitions, our focus in investment practice is still on the first two types of enterprises, which is also the direction of our current key investment in the consumer sector.

Ⅱ. Rise of domestic products: dual engines of category breakthrough and brand going overseas

In terms of investment criteria, we consistently adhere to the principle that companies must establish a comprehensive capability matrix across three dimensions: product or brand, channel layout, and supply chain management. As a PE investment firm, we believe that companies should not only possess certain characteristics at the brand level or achieve sudden success with a single product while having significant weaknesses in other areas. Such companies may experience rapid growth for 2-3 years initially, but they will inevitably face development bottlenecks eventually.

In terms of investment strategies, we remain focused on two major industry trends: the rise of domestic products and consumption upgrading. However, both face certain challenges in the post-pandemic era. Against the backdrop of economic pressures and weakened consumer confidence in the post-pandemic period, how should we reassess these two investment themes?

Taking the rise of domestic products as an example, we will continue to focus on two core dimensions:

First, the ability to redefine categories. These companies often do not create entirely new categories but instead innovate within existing major product lines by optimizing and iterating to create new product models that can replace traditional products. For instance, a recent juice product we surveyed falls into the juice subcategory but breaks the traditional beverage industry's perception of juice by innovating in packaging, core ingredients, formulation, and taste. By raising its price range, it offers channel partners a better profit margin; and by targeting the catering industry as a breakthrough point, it has achieved rapid market growth in certain regions.

Although such products may face challenges during regional expansion, such as failing to capture a market in a specific area on schedule or requiring additional time for adjustments, we are not concerned about the risk of market decline after a short-term surge in popularity. Over the long term, due to continuous product upgrades, price range optimization, and channel strategy improvements, these projects with sustainable growth potential are our key focus for stable investment targets.

Second, brand going overseas. From a longer-term perspective, with the improvement of Chinese cultural influence and the ability of Chinese consumer enterprises to enhance, the "brand going overseas" of Chinese consumer enterprises will show a sustainable development trend in the future, which is expected to continue for ten or even twenty years, with significant long-cycle characteristics.

In the past, consumer companies that leveraged China's supply chain advantages to expand overseas were typically referred to as' cross-border e-commerce. 'However, the more precise term now is' brand going global,' which refers to Chinese consumer brands entering the global market. On a broader scale, this involves Chinese consumer companies exporting their consumption concepts and lifestyles globally, much like how Coca-Cola became a global brand after World War II.

In the traditional cross-border e-commerce model, enterprises mainly rely on China's supply chain advantages to open a large number of stores on overseas e-commerce platforms such as Amazon to sell products. However, this model has obvious limitations —— Products lack distinct brand characteristics, systematic investment in brand building is not carried out, and the market share in the category is relatively limited.

Currently, we are observing a new trend: an increasing number of Chinese companies are shifting their strategies to implement brand-building strategies in overseas markets. The key features include: actively investing marketing resources to shape brand images; moving away from the previous extensive model of operating thousands of stores and stocking all categories, focusing instead on specific niche markets; by refining a single product line, companies can secure a top-three or even first position in their niche markets.

After a thorough review, we have identified several representative success stories in various niche markets. For instance, a company specializing in smart light strips has secured the top spot in the niche market in the U.S. market. Another company, which focuses on high-end outdoor flashlights and lighting equipment, has become the leading brand in this segment in Europe and America.

These companies have moved beyond the simple 'sales logic' and now focus on long-term development. They build market barriers through brand building and deep engagement in niche markets. This model not only offers sustained investment value but also presents strategic opportunities for the industry. Beyond lighting, similar companies are also emerging in sectors like clothing, digital electronics, and personal care.

Ⅲ.A new way to upgrade consumption: High frequency rigid demand breakthrough, technology to build new barriers

As for consumption upgrading, we still adhere to the long-term view that people's fundamental demand for a better life will not change. As long as consumer confidence gradually improves with economic recovery, consumption upgrading is an inevitable trend in the long run, and consumers will always pursue better quality products.

No matter how the market defines this trend, we believe that selling quality products at a reasonable price is the long-term direction. However, in the current market environment, we will focus on products with the following characteristics:

The first is the upgraded products with low unit price and high repurchase rate. Although these products have achieved quality upgrading, their absolute prices are still controlled in a low range.

For instance, the category of wet toilet paper typically costs only a few yuan per pack. Compared to traditional dry wipes, this is indeed an upgrade in user experience, but it does not significantly increase daily expenses. For example, a pack of 80 rolls of wet toilet paper costs about 5-7 yuan, which is slightly more expensive than regular toilet paper. However, most consumers, once they recognize the value of the product, do not find this price difference burdensome.

For example, some upgraded eggs cost about 2 yuan each, which seems higher than the regular price of 0.7 to 1 yuan per egg. However, if you consume one egg per day, the monthly additional cost is only about 30 yuan. This extra cost is entirely acceptable for families that prioritize food safety, such as those with children or young consumers.

Even in an environment where overall consumption is becoming more rational, such high-end consumption products can still maintain a steady expansion of the consumer base. Moreover, these products typically have a high repurchase rate. Once consumers identify with a brand, they tend to form a consistent purchasing habit, neither frequently switching brands nor occasionally using a product once and then stopping.

Therefore, we believe that in the current market stage, such products that can form new consumption habits in traditional big categories are more likely to achieve rapid growth in the short term, especially the emerging brands that have formed a certain scale and are among the top three (preferably the first) in the segment category.

Secondly, there are consumer enterprises that possess technological barriers and long-term growth potential. Although these companies may face short-term challenges as they upgrade products, the key is their own barriers and their reliable long-term development potential. For such companies, if invested in at a reasonable valuation, although it might take two to three years or even longer, they are expected to enter a period of rapid growth in the future.

For instance, a company we surveyed last year is at the forefront of smart lighting technology, significantly outperforming its competitors. Currently, the smart lighting market is primarily focused on single-item consumption, such as consumers buying individual smart lamps that can be controlled via mobile phones or voice commands, which have relatively low technical requirements for control systems. However, in the future, as whole-house smart lighting scenarios become more common (such as controlling 200 lights simultaneously in a household), the technical demands for smart control systems will rise significantly, potentially eliminating most small companies with insufficient technological reserves. 

Moreover, opportunities also exist in the commercial application sector. For instance, in hotel settings, adopting a wireless control system can significantly reduce cabling costs compared to traditional wired solutions. However, this approach places extremely high demands on the stability of communication technology. Frequent disconnections in the wireless system (such as sudden lighting failures during guests' bathing) can lead to serious operational issues. This is precisely where our company has a significant competitive advantage —— its core technology ensures stable control in complex scenarios.

Although the high-end decoration market is currently experiencing a contraction due to fluctuations in the real estate sector and the rationalization of consumer spending, leading to a slowdown in the short-term growth of these companies, we also observe two key factors: first, these companies continue to maintain a stable profit level; second, with nearly 400 million existing commercial housing units, there will be a significant demand for renovation and refurbishment in the future. Should the economic cycle improve or specific industry opportunities arise, these companies with technological barriers are poised for explosive growth.

Therefore, this kind of technology-driven enterprises in the field of consumer life are also the focus and layout direction we pay attention to at the present stage.

Ⅳ.Scale leader, growth champion and reverse opportunity

In terms of the selection criteria for investment targets, we focus on three types of enterprises:

The first category is the category leader with a considerable scale. Although the valuation of this kind of enterprise may be high in the past, now more and more such targets have emerged that meet our investment criteria, especially those enterprises with better growth.

The second category is the champion of rapidly growing emerging categories. Its core characteristics are as follows: first, it has built up market competition barriers in a specific segment; second, the long-term growth space of enterprises is higher than that of the first category mentioned above. Such enterprises will achieve rapid development when the market environment improves.

The third category involves investment opportunities arising from the difficulty of exiting. Given the current macroeconomic and consumer investment environment, we believe that investment opportunities have not diminished but have become more diverse. Observing the project supply side, companies that secured funding during the peak of consumption investment from 2018 to 2022 are now facing significant exit pressures. This indicates that there are numerous projects with good fundamentals despite recent valuation adjustments, creating favorable conditions for our investments.

Overall, as investment institutions, we should adopt a long-term perspective, thoroughly analyze the core competitiveness of enterprises, and accurately identify structural investment opportunities in the dual trends of consumption upgrade and the rise of domestic products. By continuously monitoring changes in consumer behavior and technological advancements, we can dynamically optimize our investment portfolio to maximize investment value while controlling risks.