20151208-招商证券_香港_-Consumer_Discretionary_Equity_Strategy_2016_41页_1mb

Consumer Discretionary Equity Strategy 2016 Summary

Core Content Overview

This report provides an analysis of the Chinese consumer discretionary sector, with a specific focus on the retail and sportswear industries, and outlines investment opportunities in the Hong Kong market. The document is authored by Eugene Mak, December 2015, and is part of a broader strategy for the year 2016.

Mainland China Retail Sector

• Growth Outlook: The retail sector faces challenges, but specific segments like sportswear and selective apparel retailers have shown signs of recovery.
• Market Consolidation: Ongoing consolidation is expected to improve the sector's performance.
• Consumer Preferences: There is a shift in consumer preferences towards quality over price, and the market is expected to benefit from increased policy support to stimulate domestic demand.
• E-commerce Impact: E-commerce is growing rapidly, but it is still primarily driven by younger, lower-income consumers. Offline retail growth is expected to remain at 5%-6% YoY in 2015.
• Investment Opportunity: Mass market retail brands and sportswear companies that are less affected by online competition are preferred due to their resilience and potential for growth.

Hong Kong Retail Sector

• Challenges: HK retailers face weak performance due to a slowdown in Chinese visitor growth, a strong HKD, and local economic conditions.
• Currency and Spending: The strong HKD and economic slowdown in China have led to a decline in spending by Chinese visitors, with a higher proportion of single-day visitors.
• Rental Trends: Rental softening is expected but will not significantly impact performance until 2016.
• Sales Pressure: Sales growth remains under pressure, with no clear catalyst for improvement.

E-commerce Trends

• Market Share: E-commerce accounted for 10.7% of total retail sales in 2014 and is growing at 40% annually.
• Demographics: E-commerce is mainly driven by younger and lower-income consumers, who tend to purchase non-branded, low ASP items.
• Valuation Concerns: E-commerce platforms are highly valued but often non-profitable, making them less attractive for investment compared to traditional retailers.

Investment Thesis

• Sector Recovery: The discretionary retail sector has been in a downturn, leading to polarization and under-coverage, which presents an opportunity for returns.
• Quality Retailers: Quality retailers have shown resilience and are less affected by market downturns.
• Valuation and Dividends: Low valuations and high dividend yields make certain stocks attractive, especially those with a clear turnaround in earnings.

Retailers to Watch

• Preferred Brands: Mass market retailers with strong brand power and management teams that can adapt to changing conditions.
• Turnaround Plays: Companies expected to recover, such as Xtep, 361 Degrees, and China Lilang.
• Risk/Reward: Focus on companies with low P/E, high dividend yield, and low downside risk.

Catalysts for Growth

• Political Factors: Expected government measures to support domestic consumption.
• Company Turnarounds: Continued recovery in the sportswear sector.
• Emerging Brands: Growth in mass market brands that are immune to online competition.
• Investor Interest: Increased interest in quality stocks as safe havens.

Stock Recommendations

• Top Picks:
  • Xtep (1368 HK, BUY, TP: HKD4.88)
  • 361 Degrees (1361 HK, BUY, TP: HKD3.61)
  • China Lilang (1234 HK, BUY, TP: HKD8.52)
  • Cosmo Lady (2298 HK, BUY, TP: HKD9.25)
  • Sinomax (1418 HK, BUY, TP: HKD1.43)
• Neutral Stocks:
  • I.T (999 HK, NEUTRAL, TP: HKD2.19)
  • Chow Tai Fook (1929 HK, NEUTRAL, TP: HKD5.42)
  • Luk Fook (590 HK, NEUTRAL, TP: HKD19.51)
  • Trinity (891 HK, NEUTRAL, TP: HKD0.83)
• Currently of Interest: Pou Sheng (3813 HK, Non-rated)

China Sportswear Sector

• Turnaround: The sector is experiencing a turnaround due to improved inventory levels, brand improvements, and a shift in management focus.
• Government Support: Policies to boost the sports sector, including increasing sports output, expanding sports facilities, and tax incentives.
• Performance Trends:
  • Revenue growth for major sportswear brands is expected to improve.
  • Xtep is highlighted as a top pick due to its attractive risk/reward, low valuation, and potential for earnings turnaround.
  • 361 Degrees is also recommended due to its strong earnings growth and low valuation.
• Financial Metrics:
  • Xtep has a strong balance sheet and improved cash flow.
  • 361 Degrees has shown consistent earnings growth and is undervalued.
  • Other brands like Anta and Li Ning are also expected to perform well, with improving gross margins and operating efficiencies.

Valuation and Performance Metrics

• Forward P/E Bands: Xtep and 361 Degrees are currently undervalued, with low P/E ratios and high dividend yields.
• Gross Profit Margins: Improving gross margins are a positive sign for the sector.
• Peer Comparison: Xtep and 361 Degrees are among the most attractive in terms of valuation and performance.

Key Takeaways

• The Chinese consumer discretionary sector, particularly the sportswear segment, is showing signs of recovery.
• Investment in mass market brands and those with strong brand power and management is recommended.
• Xtep and 361 Degrees are highlighted as top picks due to their low valuations and strong performance potential.
• The sector is expected to benefit from government policies and improved market conditions.