20160111-法国巴黎银行-HONG_KONG_CHINA_CONSUMER_Play_defensive_33页_1mb

HONG KONG/CHINA CONSUMER SUMMARY

Core Content

This report provides an analysis of the consumer sector in Hong Kong and mainland China, focusing on retail and education industries. It highlights the challenges faced by the retail sector due to market turbulence, weak consumer demand, and external factors such as the RMB depreciation and increased competition. The report also evaluates the education sector, noting its defensive nature and potential for growth. Additionally, it discusses Shenzhen, a company with positive developments and a BUY recommendation.

Main Points

Retail Sector

• Market Conditions: The retail sector in Hong Kong and mainland China is facing a challenging environment due to weak consumer sentiment and reduced discretionary spending.
• Impact of RMB Depreciation: The depreciation of the RMB is expected to reduce tourist spending from mainland China to Hong Kong.
• Price Competition: Retailers are likely to continue intense price competition to clear inventories, leading to discounts and margin erosion.
• Consumer Behavior Shift: There is a shift in consumer preferences towards cheaper and fast-to-market products, with the rising popularity of Korean brands.
• Stock Recommendations:
  • REDUCE on Sa Sa and Chow Tai Fook due to weak demand for discretionary items and no valuation premium.
  • HOLD on Luk Fook due to its reliance on Hong Kong and lower-margin gold products.
• Valuation Summary:
  • The report includes a table of valuation metrics for various retail companies.
  • The average CY16E P/E for Hong Kong retailers is 10.6x, and for PRC retailers is 11.1x.
  • The average CY16E EV/EBITDA for retail stocks is 10.7x.

Education Sector

• Market Growth: The China private education market is expected to grow to RMB600b in 2015, with online education accounting for RMB120b.
• Key Drivers: Increased household income, affordability of higher tuition fees, and the two-child policy are key drivers for long-term growth.
• Positive Trends:
  • Strong student enrolment growth across different players and age groups.
  • Higher utilization rates and potential for ASP growth and margin expansion.
• Stock Recommendations:
  • Prefer China Maple Leaf for visible growth reflected by a 32% increase in deferred revenue.
  • Continue to Like New Oriental despite recent share price rallies, expecting strong K-12 student enrolment growth.
• Valuation Summary:
  • A table of valuation metrics for education service providers and international school operators.
  • The average CY16E P/E for educational stocks is 19.6x.
  • The average CY16E EV/EBITDA for educational stocks is 11.0x.

Shenzhen

• Positive Developments:
  • The company is expected to see a 11% sales volume growth in FY15.
  • Nike is the dominant customer, with Uniqlo showing high single-digit growth.
  • Flyknit is expected to grow 30–40% due to the addition of 500 machines.
  • The company's gross margin is expected to increase due to favorable cotton prices and exchange rate movements.
• Financial Projections:
  • FY15 turnover is expected to grow 13.2% to RMB12.6b.
  • Operating margin is expected to improve from 19.6% in FY14 to 21.7% in FY17.
  • Net profit is expected to grow 16.6% in FY15.
• Stock Recommendation: BUY with a target price of HKD47.72 based on 20x FY16 P/E.

Key Information

• Consumer Pullback: The pullback in consumer spending has led to a decline in retail sales and a shift in product mix to cheaper goods.
• Exchange Rate Impact: The strong HKD vs a depreciating RMB affects tourist spending and export competitiveness.
• Company-Specific Analysis:
  • Sa Sa: Reduced target price due to weak demand and no valuation premium.
  • Chow Tai Fook: Reduced target price based on average P/E for Hong Kong retailers.
  • Luk Fook: Held with a lower target price due to its reliance on Hong Kong and lower-margin products.
• Education Sector: The report highlights the defensive nature and growth potential of the education sector.
• Shenzhen: A quality company with positive developments, including the expansion of Vietnam plants and the growth of Flyknit.

Conclusion

The report concludes that the retail sector in Hong Kong and mainland China remains vulnerable due to weak consumer demand and market conditions. The education sector, on the other hand, is seen as defensive with strong growth potential. Shenzhen is highlighted as a company with positive developments and a BUY recommendation.