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Summary of HK/China Retail (Department Stores, Cosmetics, Home Appliances) Analysis

Core Content

This analysis focuses on the performance and strategies of retail sectors in Hong Kong and China, with particular emphasis on department stores, cosmetics retailers, and home appliance chains. The report outlines the current challenges, future opportunities, and investment recommendations for these sectors.

Main Points

1. Sector Performance Overview

• Department Stores:

  • Expected to report a 10% - 15% earnings drop in 1H14 due to competition from e-commerce, cooling property investment, and anti-corruption campaigns.
  • SSSG (Same Store Sales Growth) will improve in 2H14 due to base effect.
  • Labour and rental costs are putting pressure on profit margins.
  • Intime and New World Department Store are noted as regional leaders in the sector.

• Cosmetics Retailers:

  • SSSG is expected to be dragged down by lower purchasing power of mainland visitors.
  • Online cosmetics sales are growing rapidly, with a CAGR of 33.2% from 2014E to 2018E.
  • Sa Sa and Bonjour are cosmetics retailers with mixed performance and lower growth expectations.

• Home Appliance Chains:

  • Gome Electrical and Haier Electronics are highlighted as leading players with strong fundamentals.
  • Home appliance chains are optimizing supply chains to enhance profitability.
  • Gome is expected to see sales through third parties soar and e-commerce contribution to total sales reaching 15% in 2017.

2. Omni Channel Strategy

• Omni channel is a key growth driver for retailers.
• Intime and Gome are recommended due to their aggressive O2O (Online to Offline) strategies.
• Intime launched intime.com in 2010, and online sales increased from 4.5% (2013) to 9.8% (2016).
• Gome is expanding through cooperation with supermarkets and e-commerce platforms, and is expected to double sales and net profit from 2013 to 2017.

3. Valuation and Financials

• Department stores are trading at 10x P/E (2015E).
• Home appliance chains are valued at 17x P/E (2015E).
• Cosmetics retailers are valued at 14x P/E (2015E).
• Intime and Gome are BUY recommendations, while Sa Sa and Bonjour are NEUTRAL.

4. Key Catalysts

• Improved SSSG in 2H14 for all sectors.
• Channel expansion and increased third-party sales for Gome.
• China business restructuring for Sa Sa.
• Deal with Alibaba for Haier, expected to boost third-party logistics in 2H14.

5. E-commerce Impact

• Online retail sales are expected to grow at a CAGR of 31% from 2013 to 2017.
• Apparel and 3C products are the largest online categories.
• B2C is becoming more dominant than C2C, with B2C market share expected to reach 50% by 2016.
• Mobile shopping is growing rapidly, with penetration rate expected to reach 24% of total online sales in 2017.

6. Supply Chain Optimization

• Supply chain management is a critical factor for e-commerce and integrated channel service providers.
• JD.com and Suning have largest in-house logistics networks, giving them a scale advantage.
• Haier is focusing on large goods delivery and logistics as a future growth driver.

Key Information

• Intime Retail (1833 HK):

  • Online sales grew from 4.5% (2013) to 9.8% (2016).
  • SSSG is expected to grow at 2% / 4% / 5% from 2014E to 2016E.
  • Net profit is forecasted to grow at a CAGR of 8%.
  • P/E (2015E): 11x.

• Gome Electrical (493 HK):

  • 1H14 net profit growth is expected to be more than 80% YoY.
  • Target Price (2015E): HK$1.8.
  • E-commerce contribution to total sales is expected to reach 15% in 2017.
  • P/E (2015E): 11.9x.

• Haier Electronics (1169 HK):

  • 1H14 earnings growth is expected to be 21% YoY.
  • Target Price (2015E): HK$24.8.
  • Logistics is a future growth driver, with net margin above 2%.
  • P/E (2015E): 17.5x.

• Sa Sa International (178 HK):

  • SSSG is expected to be 5% -7% in 2014.
  • Earnings growth from 2015-2017 is expected to be 8%.
  • P/E (2015E): 15.8x.

• Bonjour Holdings (653 HK):

  • SSSG is expected to be slight in 1H14.
  • P/E (2015E): 12x.

Conclusion

• Omni channel strategy is the key to long-term success in the retail sector.
• Home appliance chains are expected to outperform due to supply chain optimization.
• Department stores face short-term challenges but may recover in 2H14.
• Cosmetics retailers are affected by lower mainland visitor spending power, but online strategies could help mitigate this.
• Investment recommendations include Intime and Gome Electrical as BUY due to their strong O2O strategies and growth potential.