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Summary of Hong Kong Retail Market Analysis

Core Content

The Hong Kong retail sector experienced a slowdown in July 2018 compared to June 2018, with retail sales growth decreasing from 12% to 7.8% year-over-year (YoY). This decline was attributed to a stronger base effect from the previous year. Despite this, the overall market sentiment remains resilient, with many companies reporting positive quarter-to-date (QoQ) performance.

Main Views

• July Sales Growth:

  • Hong Kong retail sales grew by 7.8% YoY in July 2018, down from 11.9% in June 2018.
  • The jewelry and watches category saw a slowdown from 17% in June to 17% in July, but still outperformed other categories.
  • Cosmetics and drugstores category also slowed, from 18% in June to 13% in July, due to a higher base from the previous year.

• Company Comments:

  • Chow Sang Sang (0116.HK): QoQ sales growth reached high teens, up from over 30% in the previous quarter.
  • Chow Tai Fook (1929.HK): QoQ sales growth was at 20% in Hong Kong and high single-digits in China, up from 26% and 4% respectively.
  • Lifestyle (1212.HK): July sales were below 10%, but August rebounded to double-digit growth.
  • Wharf REIC (1997.HK): Sales growth remained strong in July and the first week of August, with no signs of a slowdown yet.
  • Hysan Development (0014.HK): Retail rental reversion was largely neutral YoY in 1H18, and no guidance was given for 2H18 due to macro uncertainties.

• Macro Concerns:

  • Investors remain concerned about the slowdown in China consumption, weaker macroeconomic data, and potential RMB depreciation against HKD.
  • These factors could impact tourist spending and high-end consumption in Hong Kong.
  • Despite these concerns, the near-term data points suggest resilience, particularly with the holiday shift and the commencement of the high-speed railway in September 2018.

• Future Outlook:

  • Retail sales growth in Hong Kong is expected to moderate in the third quarter (3Q18), with estimates of 12% for Luk Fook, 10% for Chow Tai Fook, and 13% for Sa Sa in September 2018.
  • Growth is projected to further slow in the fourth quarter (4Q18), to 10%, 8%, and 5% respectively.
  • The market remains cautiously optimistic, with the base and wealth effect expected to lead to slower growth in the coming quarters.

• Investment Ratings:

  • Buy rating: Luk Fook Holdings (HK$28.35)
  • Neutral ratings: Chow Tai Fook Jewellery Group (HK$7.49) and Sa Sa International Holdings (HK$4.20)

Key Information

• Trend Resilience: Despite the slowdown in July, the quarter-to-date performance of many retail companies shows resilience, indicating that the market may still be on track for growth.
• Holiday and Infrastructure Impact: The shift of the Mid-Autumn Festival holiday to September and the start of the high-speed railway service on September 23 are expected to support retail sales in September 2018.
• Travel Data: TravelSky estimated that Chinese regional airline traffic would remain resilient, growing at 10%+ through October 2018.
• Investor Sentiment: While there are concerns about macroeconomic factors and RMB depreciation, the retail market is still viewed as relatively stable, with some positive momentum in lease renewals for landlords.

Supporting Data

• Exhibit 1: Cosmetics and Jewelry growth slowed in July 2018, but remained strong compared to other categories.
• Exhibit 2: Hong Kong retail sales growth declined in July due to a tougher base, but remained above expectations.
• Exhibit 3: Chinese regional airline traffic showed resilience, with growth expected to continue into October 2018.
• Exhibit 4: Chinese outbound tourists to South Korea remained strong, indicating a possible shift in travel patterns.

Regulatory and Disclosure Information

• The report is authored by Michelle Cheng and Justin Kwok, CFA, and is part of Goldman Sachs' Global Investment Research.
• Coverage Groups:
  • Michelle Cheng: Greater China Retail
  • Justin Kwok, CFA: Hong Kong Property
• Investment Banking Relationships:
  • Goldman Sachs expects to receive or seek compensation for investment banking services from Chow Tai Fook Jewellery Group and Hysan Development.
  • Goldman Sachs has investment banking relationships with Chow Tai Fook Jewellery Group, Hysan Development, Luk Fook Holdings, Sa Sa International Holdings, and Wharf REIC.
• M&A Rank:
  • Chow Tai Fook Jewellery Group and Luk Fook Holdings are ranked as M&A Rank 1 (high probability of acquisition).
  • Sa Sa International Holdings is ranked as M&A Rank 2 (medium probability of acquisition).
• GS Factor Profile:
  • The profile includes Growth, Financial Returns, Multiple, and Integrated percentiles to evaluate stock performance.
• Quantum:
  • A proprietary database used for detailed financial analysis.
• GS SUSTAIN:
  • A global investment strategy focusing on long-term alpha generation through identifying high-quality industry leaders.

Distribution and Legal Disclosures

• The research is distributed by Goldman Sachs offices globally, including in Australia, Brazil, Canada, Hong Kong, India, Japan, New Zealand, Russia, Singapore, the UK, and the EU.
• It is intended for wholesale clients in Australia, retail clients in the UK, and qualified investors in other jurisdictions.
• Analysts are prohibited from owning securities of companies in their coverage areas and are not allowed to serve as officers or directors.
• The research is not considered advertising in Russia and does not provide appraisal services.
• In Japan, Goldman Sachs is a registered Financial Instrument Dealer, and equity transactions are subject to commission and consumption tax.
• The report is subject to change and is based on current public information.

Definitions

• Buy (B): Analysts recommend the stock for inclusion on regional Investment Lists.
• Neutral (N): No specific recommendation, indicating a balanced outlook.
• Sell (S): Analysts recommend the stock for exclusion from regional Investment Lists.
• Not Rated (NR): Investment rating and target price have been removed.
• Rating Suspended (RS): Investment rating and price target are suspended.
• Coverage Suspended (CS): Goldman Sachs has suspended coverage of the company.
• Not Covered (NC): Goldman Sachs does not cover the company.
• Not Meaningful (NM): Information is not meaningful and is excluded.

Conclusion

While Hong Kong retail sales growth slowed in July 2018, the market remains resilient with positive QoQ performance and supportive factors such as holiday shifts and the high-speed railway. Despite macroeconomic concerns, the outlook for the sector is cautiously optimistic, with Goldman Sachs maintaining Buy and Neutral ratings for key players. Investors should continue to monitor the impact of RMB depreciation and China consumption trends on the sector.