20151207-招商证券_香港_-Consumer_Discretionary_Equity_Strategy_2016_41页_2mb_2mb

Consumer Discretionary Equity Strategy 2016 Summary

Core Content

This report from Eugene Mak, December 2015, provides an in-depth analysis of the Chinese and Hong Kong retail and sportswear sectors, focusing on investment opportunities and sector performance.

Mainland China Retail Overview

• Growth Outlook: The retail sector faces continued challenges, but specific sectors and retailers are showing signs of recovery, particularly in sportswear and selective apparel.
• Market Consolidation: The sector is consolidating, with the worst phase considered over.
• Consumer Preferences: There is a shift in consumer preferences towards quality over price.
• E-commerce Impact: E-commerce is growing rapidly, accounting for about 10.7% of total retail sales in 2014 and expected to reach 20% by 2015. However, it remains focused on younger, lower-income demographics.
• Government Support: Anticipated policy support is expected to boost local domestic demand.

Hong Kong Retail Outlook

• Visitor Decline: Hong Kong's retail sector is under pressure due to a slowdown in Chinese visitor arrivals and weakened local consumer sentiment.
• Currency Factors: The strength of the USD relative to HKD and weak foreign currencies is influencing Chinese visitors to choose other shopping destinations.
• Rental Trends: Rental reductions for street-level stores are not expected to significantly impact sales until 2016 and are not seen as a sustainable growth driver.
• Sales Pressure: Sales growth remains pressured, with no clear catalyst for improvement.

E-commerce in China

• Offline Growth: Offline traditional retail is expected to grow at 5%–6% YoY in 2015, down from 13% in 2012 and 9% in 2014.
• E-commerce Growth: E-commerce is growing at +40% annually.
• Target Demographics: E-commerce is dominated by younger, lower-income consumers buying non-branded, low ASP items.

Investment Thesis

• Sector Opportunity: The discretionary retail sector has been underperforming and under-covered, making it an attractive opportunity for investment.
• Quality Retailers: High-quality retailers have shown resilience and outperformed during market downturns.
• Valuation: Many quality retailers are undervalued, offering attractive risk/reward ratios with strong dividends and low P/E ratios.

Retailers to Watch

• Mass Market Brands: Preference is given to mass market retail brands that are less affected by online competition, with strong brand power and management.
• Turnaround Plays: Retailers in sectors expected to turn around are considered, especially those still undervalued.
• Attractive Metrics: Focus on companies with low P/E and high dividend yield, and those with catalysts for growth and low downside risk.

Catalysts

• Political: Government measures to support local consumption are likely, while austerity measures are unlikely.
• Company-Specific Turnaround: Brands such as Xtep, 361 Degrees, and China Lilang are expected to show improvement.
• Mass Market Brands: Emerging mass market brands that can benefit from online platform growth are of interest.
• Valuation: High-quality retailers with attractive valuations are seen as safe havens.

Stock Recommendations

Current Picks

• Xtep (1368 HK): BUY, Target Price: HKD4.88
• 361 Degrees (1361 HK): BUY, Target Price: HKD3.61
• China Lilang (1234 HK): BUY, Target Price: HKD8.52
• Cosmo Lady (2298 HK): BUY, Target Price: HKD9.25
• Sinomax (1418 HK): BUY, Target Price: HKD1.43

Stocks of Interest

• Pou Sheng (3813 HK): Non-rated

Underperformers

• I.T (999 HK): NEUTRAL, Target Price: HKD2.19
• Chow Tai Fook (1929 HK): NEUTRAL, Target Price: HKD5.42
• Luk Fook (590 HK): NEUTRAL, Target Price: HKD19.51
• Trinity (891 HK): NEUTRAL, Target Price: HKD0.83

China Sportswear Sector

Sector Turnaround

• Inventory Levels: Major brands have returned to normal inventory levels (4–5 months).
• Consolidation: Brand and POS consolidation is ongoing.
• Improvements: Significant improvements in brand, design, technology, and management since 2011.
• Focus Shift: Management has shifted from POS expansion to improving SSSG (Sales, Store, Service, and Growth) and efficiency.
• Demand Trends: Increased demand for performance sports products due to rising participation in exercise.

Government Policies

• Sports Output Target: Expected to reach RMB5 trillion by 2025.
• Sports Facilities: Target of 2 sqm per person by 2025.
• Exercise Participation: Target of 500 million regular exercisers by 2025.
• Tax Incentives: Reductions in corporate income tax and operation tax for sports-related companies.
• Winter Olympics: Beijing's hosting of the 2022 Winter Olympics may push further policies to support the sportswear and fitness sectors.

Market Size and Growth

• Market Size: The sportswear market is growing with positive outlooks for the sector.
• Historical Revenue Growth: Historical revenue growth data shows a mix of positive and negative trends across brands.

Market Share and Product Breakdown

• Product Mix: Brands like Anta, Li Ning, and Xtep have a strong focus on apparel, with some diversification into footwear and accessories.
• Market Share: Data shows varying market shares among sportswear brands, with Xtep being a notable player.

Financial Metrics

• GPM and OPM: Gross margin and operating margin data indicates varying performance across brands.
• Peer Comparisons: Xtep has lower valuation compared to its peers, despite strong operations.

Xtep as Top Pick

• Valuation: Xtep is undervalued, with attractive risk/reward due to its low P/E and high dividend yield.
• Earnings Turnaround: Expected earnings turnaround is a key catalyst.
• Target Price: Based on 13x FY16E P/E, with positive outlook for growth and performance.

361 Degrees as Another Pick

• Valuation: 361 Degrees is also undervalued with strong earnings growth expected.
• Target Price: Based on 11x FY16E P/E.

Summary Table of Key Metrics

Conclusion

The sportswear sector in China is showing signs of recovery, driven by inventory normalization, brand improvements, and government support. Xtep and 361 Degrees are highlighted as top picks due to their attractive valuations, strong fundamentals, and expected earnings growth. The report suggests that investors should focus on mass market brands with resilience and strong management capabilities, as well as those undergoing a turnaround, with a particular emphasis on low valuation and high dividend yield as key investment criteria.