20180207-中国银河国际证券-Hong_Kong_Retail__Signs_of_a_Happy_Chinese_New_Year_RMB_Appreciation_and_Macro_Data_Supportive_to_Retailers_11页_346kb

Summary of China Consumer Sector and Hong Kong Retail Analysis (February 7, 2018)

Core Content

The document provides an analysis of the Hong Kong retail sector and its connection to the RMB exchange rate, along with investment ideas and risks for specific companies in the consumer discretionary space. The focus is on the impact of RMB appreciation on retail sales and the potential for investment opportunities in the sector.

Main Points

• RMB Appreciation and Retail Sales: Since January 2017, the RMB has appreciated over 10% against the HKD, creating opportunities for the Hong Kong retail sector. This is due to the relatively cheaper prices of goods in Hong Kong for Mainland consumers, especially luxury items like watches and jewelry.

• Retail Recovery in 2017: Hong Kong retail sales showed recovery in December 2017, increasing by 5.8% YoY, though weaker than expected (6.7% consensus). This was attributed to local consumers traveling abroad during the holiday season, while Mainland tourists continued to drive retail sales.

• Macro Data Indicators:

  • Macau's gaming GGR and the Nikkei Hong Kong PMI are leading indicators of Hong Kong retail performance.
  • Macau's January 2018 GGR increased by 36.4% YoY, which could have a positive impact on Hong Kong retail, though the recovery was mainly driven by the VIP segment.
  • The PMI remained above 50, indicating economic expansion, and could lead to a virtuous cycle where improved economic conditions boost local consumer spending.

• Wealth Effect: The strong performance of the Hong Kong stock market in 2017 has created a wealth effect that benefits both local and Mainland consumers. This effect may spill over to the Mainland, driving more tourist arrivals and retail sales in Hong Kong.

• Investment Ideas:

  • Jewellery Retailers: RMB appreciation is expected to have a moderately positive impact on Chow Tai Fook (1929 HK; HOLD), Luk Fook (590 HK; HOLD), and Chow Sang Sang (116 HK; BUY). While gold sales may be affected, gem sets and watches are likely to benefit more due to their pricing structure and appeal to Mainland tourists.
  • Cosmetics Retailers: Sa Sa International (178 HK; NOT RATED) is seen as a major beneficiary, with over 80% of its revenue coming from Hong Kong. The appreciation of the RMB makes Hong Kong products more attractive to price-sensitive Mainland consumers.

• Valuation Overview:

  • Chow Tai Fook (1929 HK) has a target price of HK$9.20, with a potential upside of over 15% if there is a 5% correction.
  • Chow Sang Sang (116 HK) is rated as a "BUY" with a current price of HK$18.44 and a target price of HK$23.00.
  • The PER and PBR metrics show varying levels of valuation across companies, with Chow Sang Sang being more attractively valued.

Key Information

• RMB and HKD Exchange Rate: RMB appreciation has made Hong Kong goods more affordable for Mainland consumers, increasing demand.
• Mainland Tourist Impact: Mainland tourists are a major driving force for Hong Kong retail, especially in the jewelry, watches, and cosmetics sectors.
• Company-Specific Risks: While the sector is recovering, individual companies may face challenges due to less-competitive products, high prices, or ineffective marketing.
• Investment Risks:
  • Exchange Rate Risk: A potential RMB depreciation could negatively impact retail sales.
  • Company-specific Risk: Not all retailers will benefit equally from the recovery, as some may not adapt to changing consumer preferences.

Conclusion

The Hong Kong retail sector is expected to benefit from RMB appreciation and increased Mainland tourist activity, especially in the jewelry and cosmetics sectors. While there are risks, such as exchange rate fluctuations and company-specific issues, the overall outlook is positive, with several companies showing potential for growth and value appreciation. Investors should monitor key indicators like the Nikkei Hong Kong PMI and Macau GGR to gauge future performance.