20181122-中国银河国际证券-Hong_Kong_Retail__Companies_Start_to_Turn_Cautious_But_Should_We_Panic__Probably_Not_6页_768kb

China Consumer Sector Summary - Hong Kong Retail (22 November, 2018)

Core Content

This report provides an analysis of the Hong Kong retail sector in the context of the broader Chinese consumer market. It evaluates recent performance, macroeconomic factors, and the impact of new infrastructure projects on retail activity. The report also includes insights from key retailers and highlights potential investment opportunities.

Main Points

• Current Retail Outlook:
  Recent macroeconomic data and retail feedback suggest a lack of optimism for the HK retail sector. However, the report indicates that short-term trading opportunities may still exist due to the relatively stable earnings outlook and the potential for dividend yields from cash-rich companies.

• Impact of RMB Depreciation and Stock Market:
  The weakening RMB and poor performance of the HK stock market have negatively impacted consumer sentiment, especially among mainland visitors and local shoppers. This has led to a decline in retail sales growth.

• New Infrastructure and Visitor Arrivals:
  The opening of the HK Express Rail Link (HKXRL) and the HK-Zhuhai-Macao Bridge has increased visitor arrivals, but the contribution to retail sales has been limited. The report suggests it may take until early-2019 for these new visitors to significantly impact retail performance.

• Comparison to Previous Downcycle:
  The report notes that the current outlook for 2019 is not as severe as the 2013-2016 downcycle, which was driven by an anti-graft campaign. The current slowdown is more attributable to the Sino-US trade war and the weak HK stock market, but the mass market continues to show recovery potential.

• Retailer Performance and Strategy:
  Several HK-based retailers, including TSL, Oriental Watch, and Sa Sa, have adopted a cautious stance, expecting flat or slightly negative sales growth in the short term. However, they have sufficient cash reserves and are not expected to expand significantly in the near future.

  • TSL: Expressed cautious optimism, with strong performance in Apr-Sept 2018 driven by gold sales. Management is focused on the mass market segment and plans to expand through franchising in the Mainland.
  • Oriental Watch: Plans to return excess cash to shareholders through dividends, with a target payout ratio of 100%. The company expects consumer sentiment to stabilize after the RMB and HK stock market correct.
  • Sa Sa: Admitted that the impact of the trade war was worse than expected. It is concerned about the crackdown on daigou (parallel imports), which affected its customer base. However, it remains positive on the long-term contribution of new infrastructure projects.

• Dividend Opportunities:
  Oriental Watch and Sa Sa are highlighted as potential dividend payers, offering yields of over 11% and possibly higher. This provides some downside protection for investors.

• Earnings Outlook:
  The report anticipates that the next major focus will be on the interim earnings of CTF and Luk Fook, which are expected to be released on 28th and 29th November 2018. The analysts have lowered their target multiples for these companies due to reduced market risk appetite.

Key Information

• Earnings Support: The strong performance in Apr-Aug 2018 supports the full-year earnings of HK retailers.
• Market Correlation: Retail sales growth in Hong Kong is highly correlated with visitor arrivals and the RMB-HKD exchange rate.
• Investment Ratings:
  • BUY: Indicates the share price is expected to increase by more than 20% within 12 months.
  • HOLD: No clear catalyst for change.
  • SELL: Indicates the share price is expected to decrease by more than 20% within 12 months.
• Dividend Yield: Oriental Watch offers a dividend yield of over 11%, which is considered attractive.

Charts and Figures

• Figure 1: Monthly Value of Retail Sales (VaRS) in Hong Kong – All Categories
• Figure 2: Monthly Value of Retail Sales (VaRS) in Hong Kong – Jewelry, Watches and Clocks, as well as Valuable Gifts
• Figure 3: Number of Visitor Arrivals to Hong Kong – September 2018 Impacted by Typhoon
• Figure 4: Growth of Retail Sales in Hong Kong and Visitor Arrivals – Highly Correlated
• Figure 5: Growth of Retail Sales in Hong Kong and Hang Seng Index – Also Correlated
• Figure 6: Growth of Retail Sales in Hong Kong and the RMB-HKD Exchange Rate – Sharp change could weigh on sentiment
• Figure 7: Macau GGR Could Be Indicative of the Growth of Hong Kong Retail Sales
• Figure 8: RMB Exchange Rate Likely to Affect Business Sentiment in Hong Kong
• Figure 9: Growth of Hong Kong Retail Sales and Nikkei Hong Kong PMI

Disclaimer and Legal Information

• This report is not directed at, or intended for distribution to, any person or entity in jurisdictions where it would be illegal.
• No representation or warranty is made regarding the accuracy or completeness of the information.
• The report does not constitute an offer to buy or sell any securities.
• The views expressed may not reflect those of China Galaxy International Financial Holdings Limited or its subsidiaries.

Analyst Certification

• The analyst certifies that all views reflect personal opinions and are not influenced by compensation.
• No trading or investment activities were conducted by the analyst or associates within 30 days prior to the report's release.

Disclosure of Interests

• China Galaxy International may have financial interests in the companies discussed.
• Some directors, officers, and employees may be affiliated with the companies mentioned.
• The firm may participate in financing transactions or provide investment services to the companies.