Capacity concern for mainland tourists could impact growth

Transcription

1 Deutsche Bank Markets Research Asia Hong Kong Industry Date 11 March 14 Forecast Change Capacity concern for mainland tourists could impact growth Lowering Sa Sa s target price by 15% with 4%/7% FY15/16 net profit revision The Chinese government for the first time acknowledged that Hong Kong s capacity for mainland tourists is a matter of concern and requested relevant departments to address the issue. With tourist spending contributing half of Hong Kong retail sales, any slowdown in tourist arrivals could put pressure on the latter. We prudently lower our HK sales assumptions for Sa Sa and cut our target price by 15% to HK$7.24, while maintaining forecasts and recommendation for Lifestyle. We rate Sa Sa a Hold given limited upside with higher macro risk (70% of HK sales from tourist spending), and rate Lifestyle a Buy due to its more balanced customer base and inexpensive valuation. China says Hong Kong s capacity for mainland tourists is a concern Zhang Dejiang, head of the National People s Congress, told a closed meeting of HK delegates at the annual NPC session in Beijing on 6 March that the government is concerned about Hong Kong s capacity for mainland tourists. He also said that the HK & Macau Affairs Office of the State Council and the China National Tourism Administration should look into the issue with the HK government. Vincent Fang, retail sector legislator, told TVB News that the government could consider reviewing the multi-entry individual travel scheme. HKTB expects 8.6% yoy tourist arrival this year vs 11.7% yoy in 13 HKTB expects total tourist arrival and mainland tourist arrival to grow 8.6%/.8% yoy to 59m/45m in 14, respectively. The Hong Kong government projects visitor arrivals to exceed 70m in 17 vs 54m in 13, and says that current facilities in Hong Kong would be able to cater for such growth based on an assessment report released in December 13. Any slowdown in tourist arrivals could put pressure on HK retail sales With tourist spending contributing half of HK retail sales, Ms. Caroline Mak, chairman of Hong Kong Retail Management Association, expects HK retail sales to experience mild growth in 14, mid single-digit to low double-digit, primarily due to a decline in growth of Chinese tourists visiting Hong Kong and cautious local consumer outlook. Lowering HK sales assumptions for Sa Sa, maintaining forecasts for Lifestyle We believe any change in tourist policy will impact HK retailers. With 70% of HK sales from tourists (mainly China), we lower our DCF-based target price for Sa Sa from HK$8.5 to HK$7.24 on weaker HK sales growth assumptions, operating de-leverage and a new WACC (new HK market COE of 7.6% (old 7.1%)). We cut our HK sales forecast by 3%/7% for FY15/16 assuming a slowdown in mainland tourist arrivals to Hong Kong. We rate Sa Sa a Hold given limited upside risk and rising risk on the macro front. We maintain our forecasts, target price and recommendation for Lifestyle. Although any slowdown in macro trend will affect the operator, we rate Lifestyle a Buy as it has a more balanced client base, prime properties and an inexpensive valuation. Anne Ling Research Analyst (+852) anne.ling@db.com Top picks SA SA International (0178.HK),HKD6.83 Hold Lifestyle International (1212.HK),HKD14.90 Buy Source: Deutsche Bank Companies Featured SA SA International (0178.HK),HKD6.83 Hold 13A 14E 15E P/E (x) EV/EBITDA (x) Price/book (x) Lifestyle International (1212.HK),HKD14.90 Buy 13A 14E 15E P/E (x) EV/EBITDA (x) Price/book (x) Source: Deutsche Bank Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/13.

2 Macro development increasing concerns on Hong Kong s capability to take on more mainland visitors China says Hong Kong s capacity for mainland tourist is a concern Zhang Dejiang, head of the National People s Congress, told a closed meeting of Hong Kong delegates at the annual NPC session in Beijing on 6 March that the government is concerned about Hong Kong s capacity for mainland tourists. This is a first time that Beijing s top official has acknowledged that the issue is a matter of concern for the central government. Mr. Zhang also said that the HK & Macau Affairs Office of the State Council and the China National Tourism Administration should look into the issue with the Hong Kong government. Vincent Fang, retail sector legislator, told TVB News that the government could consider reviewing the multi-entry individual travel scheme (Source: 6 March, SCMP; 9 March, TVB News). HKTB expects 8.6% yoy tourist arrivals this year vs 11.7% yoy in 13 In December 13, the HK Ecommerce and Economic Development Bureau had come up with an assessment report on Hong Kong s capacity to receive tourists. The report said that the major tourist facilities in Hong Kong have sufficient capacity to meet the current demand and will have sufficient capacity to receive more visitors if the growth of visitor arrivals remains steady over the next few years (it projected that visitor arrivals would exceed 70m in 17 vs 54m in 13). In addition, the sustained growth in the number of IVS visitors has enhanced the development of various sectors including tourism, retail, and food and beverage, contributed to the overall Hong Kong economy. HKTB expects total tourist arrivals and mainland tourist arrivals to grow 8.6%/.8% yoy to 59m/45m in 14, respectively. Figure 1: Total tourist arrivals vs total population Tourist arrival/hk population (x) Source: Deutsche Bank, government data Any slowdown in tourist arrivals could put pressure on HK retail sales With tourist spending contributing half of retail sales, Ms. Caroline Mak, chairman of Hong Kong Retail Management Association, expects HK retail sales to experience mild growth in 14, mid single-digit to low double-digit, primarily due to a decline in growth of Chinese tourists visiting Hong Kong and cautious local consumer outlook. Lowering Sa Sa s FY15/16 forecasts; maintaining Lifestyle s forecasts Sa Sa (178.HK, HK$6.96, TP HK$7.24, Hold) lowering FY15/16 net profit forecasts, cutting target price on macro concerns Lowering FY15/16 net profit forecast by 4%/7%. We estimate that more than 82%/99% of Sa Sa s sales/ebit in FY14 is from Hong Kong. Thanks to the implementation of individual travel scheme, price and product variety difference between Hong Kong and China, the company has seen strong earnings growth since 03. At present, tourists (mainly mainland tourists) account for 70% of Sa Sa s sales in Hong Kong. In 3QFY14, value per transaction from the mainland fell 1.5% yoy but was compensated for by a more than a % increase in the transaction volume. Any slowdown in mainland arrivals could impact its volume growth and GPM improvement (tourists from lower tier cities tend to buy more private labels). Page 2 Deutsche Bank AG/Hong Kong

3 Given the recent macro development, we prudently lower our FY15/16 net profit forecasts by 4%/7% due mainly to a 3%/7% cut in our sales assumption for Hong Kong for FY15/16 with slowdown in volume growth. Valuation lowering target price by 15% to HK$7.24. Our new target price is HK$7.24; 7% of the change is from earnings revision and 8% from the change in HK market COE. We rate Sa Sa a Hold given the limited upside from the current price. We derive our target price from a DCF valuation, in line with other consumer sector stocks, assuming a HK market COE of 7.6% (risk-free rate of 2.75%, ERP of 4.85%), as 80% of the company's business is conducted in Hong Kong and the source of funds is Hong Kong. We use beta of 1, in line with other consumer plays (range of 1.0 to 1.1) and a terminal growth rate of 1.5%, which we regard as sustainable for the company. Our DCF valuation translates into 17.8x FY15F P/E (18.4x CY14E PE, a yield of 4.0%), in line with the Hong Kong and China sector P/E range for discretionary goods. Figure 2: Sa Sa operating data 25.0%.0% 15.0%.0% 5.0% 0.0% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY FY11 FY12 FY13 FY14F -5.0% -.0% Total no of transactions (m) Value per ticket SSSG Source: Deutsche Bank estimates, company data Risk. Downside risks: 1) deteriorating macroeconomic outlook (e.g. government changing travel policy for mainlanders) and Sa Sa's aggressive store assumptions; and 2) China market not performing as strongly as expected. Upside risks: 1) P/E re-rating on the company's China growth potential; and 2) better-than-expected SSS growth for Hong Kong operation. Figure 3: Sa Sa key changes in our forecasts YE Mar HK$m DB estimates (New) DB estimates (Old) VS old DB estimates Sales EBIT Net profit Sales EBIT Net profit Sales EBIT Net profit 14F 8,887 1,9 1,013 8,887 1,9 1,013 0% 0% 0% 15F,054 1,396 1,168,345 1,451 1,213-3% -4% -4% 16F 11,233 1,590 1,331 11,895 1,703 1,426-6% -7% -7% Source: Deutsche Bank Figure 4: Sa Sa Deutsche Bank forecasts vs market consensus YE Mar HK$m DB estimates (New) Market forecast VS market forecast Sales Net profit Sales Net profit Sales Net profit 14F 8,887 1,013 8, % 2.8% 15F,054 1,168,416 1, % -2.1% 16F 11,233 1,331 12,002 1, % -8.4% Source: Deutsche Bank, Bloomberg Finance LP Figure 5: Sa Sa One-year forward PER band chart Figure 6: Sa Sa 1-year forward PE vs historical average HK$ SaSa - 1-year forward PER band chart +2 sdv: 31x Sa Sa - 1yr forward PE vs historical avg Sa Sa 1 Yr forward PE 1 Yr AVG 3 Yr AVG 5 Yr AVG sdv: 24x 30 6 Avg: 17x 25 1 Yr Avg: Yr Avg: sdv: x -2 sdv: 4x Yr Avg: Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr- Apr-11 Apr-12 Apr-13 Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP Deutsche Bank AG/Hong Kong Page 3

4 Lifestyle (1212.HK, HK$14.60, TP HK$., Buy) maintaining forecasts; Buy on inexpensive valuation More balanced customer base. PRC expansion is the key focus for Lifestyle International, with management preferring to have its own properties and to open big new stores at locations that have existing stores. However, the Hong Kong operation remains the bread and butter contributing more than 80% in sales and 90% in net profit. With the closure of the TST store in February, management is now looking for a replacement. Also, since the company benefits from the influx of mainland tourists, management s strategy is more diversified as it notes the significance of local consumers and thus sources merchandise suitable for their needs. Sales from tourists (mainly mainland tourists) accounted for 40% of sales in Hong Kong in 13. Valuation target price of HK$.. We use an SoTP valuation for Lifestyle International: for its department store operations, our target price implies 14.8x FY14E P/E, in line with our valuation for Golden Eagle; for properties, we assume a 5.5% cap rate at a 40% discount to NAV on Hong Kong properties and a 30% discount on China properties. We rate Lifestyle a Buy due to its inexpensive valuation. Figure 7: Sum-of-the-parts valuation Source: Deutsche Bank Risks. The company is exposed to execution risks related to new department store and shopping mall projects; slowing same-store sales growth in Hong Kong; and operating leverage of existing stores, including TST and Jiuguang (ongoing department store), coming in lower than our expectation. Figure 8: Lifestyle Deutsche Bank forecasts vs market consensus YE Dec HK$m DB estimates Market forecast VS market forecast Sales Net profit Sales Net profit Sales Net profit 14F 5,924 2,280 6,2 2,5-3% 3% 15F 6,435 2,546 6,634 2,431-3% 5% 16F 7,031 2,893 7,034 2,678 0% 8% Source: Deutsche Bank, Bloomberg Finance LP Page 4 Deutsche Bank AG/Hong Kong

5 Figure 9: Lifestyle One-year forward PER band chart HK$ Lifestyle - 1-year forward PER band chart sdv: 30x 40 1sdv: 23x Avg: 17x sdv: 11x 5-2sdv: 4x 0 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr- Apr-11 Apr-12 Apr-13 Figure : Lifestyle One-year forward PE vs historical average 50 Lifestyle - 1yr forward PE vs historical avg Yr avg: 14 5Yr avg: 15 1Yr avg: 12 5 Lifestyle 1yr forward PE 3yr avg 5yr avg 1yr avg 0 Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP Deutsche Bank AG/Hong Kong Page 5

6 Hong Kong tourism in charts Figure 11: HK tourist arrivals by country (mn) visitor arrivals would exceed 70m in 17 (54m in 13) Figure 12: HK tourist arrivals mix (13) and spending mix (12) 75% from China for both Figure 13: Mainland tourist arrivals growth driven by multi-entry individual visa scheme (IVS-ME)(mn) E Other countries 25% China 75% China Other countries PRC Other countries Total tourist arrivals IVS Non-ME IVS-ME non-ivs Source: Deutsche Bank, HKTB estimates Note: Source: Deutsche Bank, HKTB Source: Deutsche Bank, HKTB, government data Figure 14: Mainland tourist arrivals growth driven by same day travellers (mn) Over-night Same day Figure 15: Mainland tourist spending (HK$bn) 72% from overnight travellers Over-night Same day Figure 16: Mainland tourist per capita spending (HK$) same day travellers as key driver to total,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Over-night Same day Mainland overall Source: Deutsche Bank, CEIC, Government data Source: Deutsche Bank, CEIC, Government data Source: Deutsche Bank, HKTB Figure 17: Timeline for 49 mainland cities opened under IVS (individual visa scheme) Source: Deutsche Bank, government data Page 6 Deutsche Bank AG/Hong Kong

7 Comparing Lifestyle and Sa Sa against macro data Market share Figure 18: Department store and cosmetic and medicine sales as % to total HK retail sales (13) Figure 19: Sales of Lifestyle as % to total HK department store sales (13) (HK$m) Figure : Sales of Sa Sa as % to total HK cosmetics & medicine sales (13) (HK$m) % 8% Lifestyles,,287, % Sa Sa, 7,261, 19% Lifestyles 82% Others, 41,306, 80% Others Others, 31,065, 81% Sa Sa Others Department store sales Cosmetic & medicine sales Others Source: Deutsche Bank, Government data, CEIC Source: Deutsche Bank, Government data, CEIC Source: Deutsche Bank, Government data, CEIC Growth pattern against market Figure 21: Sales growth of Lifestyle and Sa Sa 30.0% Figure 22: Sales growth of Lifestyle vs department stores 25.0% Figure 23: Sales growth of Sa Sa vs cosmetics and medicine 30.0% 25.0%.0% 15.0%.0% 15.0%.0% 25.0%.0% 15.0%.0% 5.0%.0% 5.0% 0.0% % -5.0% % 0.0% E Lifestyle Sa Sa Lifestyle Department stores Sa Sa Cosmetics & medicine Source: Deutsche Bank, company data Source: Deutsche Bank, company data Source: Deutsche Bank estimates, company data Note: Sa Sa sales are converted on calendar year basis Traffic growth against growth in PRC tourist arrivals Figure 24: Traffic growth of Figure 25: Traffic growth of Lifestyle mainland, overnight and same day and mainland tourist arrivals Figure 26: Traffic growth of Sa Sa and mainland tourist arrivals 70% 50% 50% 60% 40% 45% 40% 50% 30% 35% 40% 30% % % 30% 25% % % 0% 15% % -% F % 5% 0% -% 0% F E14F Mainland (total) Over-night Same day Mainland (total) Lifestyle (traffic) Mainland (total) Sa Sa (no. of transaction) Source: Deutsche Bank, HKTB estimates Wanweipo Note: Source: Deutsche Bank, HKTB estimates, Wanweipo Note: Source: Deutsche Bank estimates, HKTB estimates Wanweipo Note. Note. We use fiscal year data for Sa Sa e.g. FY14 figure is used for CY 13 Note: Per capita spending growth against PRC tourist per capita spending Figure 27: PRC tourist per capita Figure 28: PRC tourist per capita spending growth (overnight vs. same spending growth vs. Sogo CWB day) value per ticket growth Figure 29: PRC tourist per capita spending growth vs. Sa Sa value per ticket growth 40% % % 30% 15% % 15% % % 5% 5% % 0% % -5% -% % -5% -% E -% -15% -15% -% -% -% -30% Mainland (total) Over-night Same day -25% Mainland (total) Value per ticket (Sogo CWB) -25% Mainland (total) Value per ticket (Sa Sa) Source: Deutsche Bank, HKTB, ifeng Note: Source: Deutsche Bank, HKTB, ifeng Note: Source: Deutsche Bank estimates, HKTB, ifeng Note. We use fiscal year data for Sa Sa e.g. FY14 figure is used for CY 13 Note: Deutsche Bank AG/Hong Kong Page 7

8 The authors of this report wish to acknowledge the contribution made by Rena Ma, an employee of Amba Research, a third-party provider to Deutsche Bank of offshore research support services and Richard Huang, employees of Evalueserve, a third-party provider to Deutsche Bank of offshore research support services. Page 8 Deutsche Bank AG/Hong Kong

9 Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure Lifestyle International 1212.HK (HKD) 11 Mar 14 NA SA SA International 0178.HK 6.82 (HKD) 11 Mar 14 NA *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Anne Ling Historical recommendations and target price: Lifestyle International (1212.HK) (as of 3/11/14) Previous Recommendations Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9, Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Date Jun 13 Sep 13 Dec /07/12: Buy, Target Price Change HKD /03/13: Buy, Target Price Change HKD /08/12: Buy, Target Price Change HKD /07/13: Buy, Target Price Change HKD /01/13: Buy, Target Price Change HKD /01/14: Buy, Target Price Change HKD. Deutsche Bank AG/Hong Kong Page 9

10 Historical recommendations and target price: SA SA International (0178.HK) (as of 3/11/14).00 Previous Recommendations Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9, Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Date Jun 13 Sep 13 Dec /03/12: Hold, Target Price Change HKD /04/13: Hold, Target Price Change HKD /06/12: Hold, Target Price Change HKD /06/13: Hold, Target Price Change HKD //12: Hold, Target Price Change HKD /11/13: Hold, Target Price Change HKD /11/12: Hold, Target Price Change HKD5.08 Equity rating key Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 07 were: Buy: Expected total return (including dividends) of % or more over a 12-month period Hold: Expected total return (including dividends) between -% and % over a 12- month period Sell: Expected total return (including dividends) of -% or worse over a 12-month period Equity rating dispersion and banking relationships % 25 % 38 % 21 % Buy Hold Sell Companies Covered 7 % 12 % Cos. w/ Banking Relationship Asia-Pacific Universe Page Deutsche Bank AG/Hong Kong

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