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June: Taking it Slow Summary

Core Content

This document provides an analysis of the Hong Kong and China retail and related sectors as of May 30, 2014, with a focus on stock valuations, performance, and potential catalysts for the second half of 2014 (2H14). It outlines the current market outlook, key challenges, and preferred stocks across different sub-sectors.

Main Points

Sector Valuation

• Sector valuations are currently undemanding, following a 10%+ share price dip across several sub-sectors over the past 3 months.
• The sector is expected to remain volatile in the near term due to lingering challenges such as anti-corruption campaigns, intensifying competition, growing online rivals, and weak consumer sentiment.
• The upcoming World Cup (June 12 - July 13, 2014) could distract discretionary spending and affect performance in the short term.

Preferred Stocks

• Top Picks: Sands China (1928 HK), Galaxy Entertainment (27 HK), Melco Crown (6883 HK), GOME (493 HK), Haier Electronics (1169 HK), Guangzhou Auto (2238 HK), Samsonite (1910 HK), and Time Watch (2033 HK).
• Yield Plays: Giordano (709 HK) and Texwinca (321 HK) offer yields >6% with modest fundamentals.

Potential Catalysts

• Gaming stocks may rebound in 2H14 due to the potential extension of border gate opening hours and the completion of the Shenzhen-Xiamen high-speed railway.
• Selected home appliance stocks could benefit from the downtrend in raw material costs (e.g., sugar, PET bottles).
• Time Watch is expected to benefit from strong demand in lower-tier Chinese cities.
• GOME is in a firm recovery phase.
• Haier maintains stable performance.
• Belle's valuation is expected to provide decent medium-term returns.

Key Information

Retail

• Top BUYs: Time Watch (2033 HK), Samsonite (1910 HK)
• Least Preferred: Luk Fook (590 HK), Chow Sang Sang (116 HK), Chow Tai Fook (1929 HK)
• Retail sales in Hong Kong declined sequentially in April, down 9.8% y-o-y, mainly due to a 40% dip in jewellers & watches.
• April sales still showed growth in other categories, such as apparels, cosmetics, and F&B.
• The performance of "tourist plays" remains uncertain due to potential government controls on tourist arrivals.
• Sales for luxury items and men's formal wear are expected to remain sluggish in May-June.
• Food retailers are unexciting, but mass-to-mid-end specialty retailers like Time Watch and Samsonite are expected to benefit from improved fundamentals and M&A activity.

Home Appliances

• Top BUY: Haier Electronics (1169 HK)
• Least Preferred: TCL Multimedia (1070 HK)
• Haier is preferred for its stable performance and rising logistics contribution from its cooperation with Alibaba Group.
• GOME is seen as a recovery play due to improved margins and cost control.

Apparels & Footwear

• Top BUY: Belle (1880 HK)
• Least Preferred: Esprit (330 HK)
• Performance has remained weak, with limited catalysts expected until July-August.
• Belle is noted for its strong cash position and manageable operating deleveraging.
• The company has lowered its sales targets but maintained margin guidance, indicating confidence in cost management.

Autos & Parts

• Top BUY: Guangzhou Auto (2238 HK)
• Least Preferred: Brilliance China (1114 HK)
• Sino-foreign auto brands are gaining market share due to localization and competitive pricing.
• Guangzhou Auto has a rich model roll-out plan for 2H14 and benefits from government procurement contracts.

Food & Beverage

• Top BUY: Tingyi (322 HK)
• Least Preferred: Want Want (151 HK)
• Raw material costs have been relatively stable, with sugar and PET costs on a downtrend, helping margins.
• Tingyi is expected to benefit from easing competition in the noodle market and improving contributions from Pepsi.
• Want Want has a strong market position but faces potential margin pressure and inventory issues.

Gaming

• Top BUYs: Melco Crown (6883 HK), Sands China (1928 HK), Galaxy Entertainment (27 HK)
• Least Preferred: Wynn Macau (1128 HK)
• The sector is expected to see improved sentiment once strong GGR numbers are reported in 2H14.
• Melco Crown, Sands, and Galaxy are favored due to undemanding valuations and good yield for downside protection.

Summary of Key Data

Analysts

• Mavis HUI: (852) 2863 8879 | mavis_hui@hk.dbsvickers.com
• Alice HUI CFA: (852) 2971 1960 | alice_hui@hk.dbsvickers.com
• Rachel MIU: (852) 2863 8843 | rachel_miu@hk.dbsvickers.com
• LEE Wee Keat CFA: (852) 2971 1929 | wk_lee@hk.dbsvickers.com
• Mark LI: (852) 2971 1935 | mark_li@hk.dbsvickers.com
• Alison FOK: (852) 2971 1938 | alison_fok@hk.dbsvickers.com

HSI

• HSI: 23,082

Market Outlook

• Patience is needed: Due to the current undemanding valuation and lingering hurdles, the focus is on stock-specific ideas rather than short-term optimism.
• Sector-specific outlook: While some sub-sectors show potential for recovery, others remain under pressure from macroeconomic and competitive factors.

Summary of Sub-Segments

Retail

• Retail valuations are undemanding.
• Key catalysts are expected in July-August.
• April sales showed a decline in jewellers and watches, but growth in other categories.
• Department stores face challenges with same-store sales.
• Mass-to-mid-end retailers are preferred.

Home Appliances

• Haier and GOME are highlighted for their recovery potential.
• Downtrend in raw material costs benefits margins.

Apparels & Footwear

• Sector remains weak, with limited catalysts.
• Belle is a top pick for long-term investors.

Autos & Parts

• Sino-foreign brands are gaining market share.
• Guangzhou Auto is a top pick due to its model roll-out and government contracts.

Food & Beverage

• Raw material costs are stable.
• Tingyi is preferred due to easing competition and Pepsi contributions.

Gaming

• Sector is expected to improve in 2H14 with strong GGR numbers.
• Melco Crown, Sands, and Galaxy are top picks.

Conclusion

The retail and related sectors in Hong Kong and China are undervalued but face near-term challenges. Analysts recommend patience and a focus on stocks with potential catalysts in the second half of 2014, such as gaming, home appliances, and selected retailers. Valuation remains attractive, and long-term fundamentals are key for recovery.