China Consumer Sector

Transcription

1 China Consumer Sector China Consumer Discretionary Company Ticker Last Price TP (HK$) (HK$) Rating CTF 1929 HK HOLD Luk Fook 590 HK HOLD CSS 116 HK BUY February 7, 2018 Hong Kong Retail: Signs of a Happy Chinese New Year RMB Appreciation and Macro Data Supportive to Retailers RMB and the performance of Hong Kong retail sales closely related. The recent appreciation of the RMB (or the weakness of the USD) has drawn the attention of many investors. Since Jan 2017, the RMB has appreciated >10% against the HKD. We believe this will create opportunities for the Hong Kong retail sector, at least in the near term. Data released by the HK Govt also suggests Hong Kong retail continued to recover in Dec We have observed that the positive correlation between the RMB exchange rate and retail performance in Hong Kong has strengthened since the recent down cycle ( ). This means that compared to the cycles before 2014, the performance of RMB vs. the HKD will have a more meaningful impact on retail sales in Hong Kong. In our view, the closer relationship between the RMB exchange rate and Hong Kong retail sales could be partly attributed to the anti-graft campaign, and now the retail market in Hong Kong is more mass-market driven, so consumers have become more price-sensitive: i.e. RMB appreciation makes goods in Hong Kong more attractive to Mainland consumers. Potential news flow about strong Mainland tourist consumption in Hong Kong during the CNY holidays should be a short-term positive catalyst, in our view. Other important data to watch: As some of the macro data is released ahead of Hong Kong s official retail sales figures (usually one month ahead), we believe this data could be indicative of overall Hong Kong retail sales performance and is worth close monitoring. This data includes (1) Macau Gaming GGR and (2) Nikkei Hong Kong PMI (Fig 5 and 6). Wealth effect going beyond Hong Kong. We also believe the strong one year performance of HK stock market could have had a positive wealth effect on overall retail sales in HK. In the past, the wealth effect was related more to consumption by local residents. But as more Mainland investors are participating the HK stock market via Stock Connect, we believe the wealth effect created in HK could spill over to the Mainland. This will in turn drive more Mainland tourist arrivals and retail sales in Hong Kong, in our view. Investment Ideas Jewellery retailers. We believe the appreciation of RMB on the whole will have a moderately positive impact on Chow Tai Fook [1929.HK; HOLD], Luk Fook [590.HK; HOLD] and Chow Sang Sang [116.HK; BUY]. As a large cap, Chow Tai Fook should look attractive again if we see another 5% correction, which should offer >15% upside, based on the target price of HK$9.20. We expect the positive impact on watches to be more noticeable. For investors who prefer to capture the recovering demand for luxury watches, pure plays such as Emperor Watch & Jewellery [887.HK; NOT RATED] and Orient Watch Holdings [398.HK; NOT RATED] may worth monitoring. Tony Li, CFA Analyst (852) tonyli@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) cmwong@chinastock.com.hk Cosmetics retailers: Drugs and cosmetics retailers were outperformers in the recent Hong Kong retail recovery. We see Sa Sa International [178.HK; NOT RATED] as a major beneficiary in this category, as the Company is the leader in this specialty retailing. More than 80% of the Company s revenue is from Hong Kong, and we expect its operating leverage to improve. Valuation of the sector Company Ticker Rating Price PER(x) EPS Grow th (%) 3-Year PBR(x) HK$ FY0 FY1 FY2 FY1 FY2 CAGR (%) FY1 FY2 Chow Tai Fook Jewellery 1929 HK HOLD Luk Fook Holdings Intl Ltd 590 HK HOLD Chow Sang Sang Hldg 116 HK BUY Sa Sa International Hldgs 178 HK NR Sources: Bloomberg, CGIS Research estimates 1

2 Hong Kong Retail Market Review December 2017: Weaker Than Expected But Not Bad The retail market in Hong Kong has shown signs of recovery since 2016 and this extended throughout The official data released by Hong Kong Census and Statistics Department confirmed the trend. In December 2017, the value of retail sales in Hong Kong reached HK$44,840m, up 5.8% YoY. While the data for December 2017 continued to show signs of improvement, it was weaker than the market expected (+5.8% vs. consensus at +6.7%). Retail sales volume was also weaker than expected, up 4.3% YoY (vs. consensus at 6.0%). Weaker figures were mainly due to locals travelling abroad According to our recent discussion with some Hong Kong-based retailers, and based on some retailers Q operating figures, the weaker December figures were not a major surprise to some retailers. One of the reasons December was weaker than expected is that more local consumers travelled abroad during the long holiday season. While local consumers have recently demonstrated resiliency in their spending power as wealth accumulates, Mainland tourists have become a major driving force in the city s retail sales. Mainland arrivals also continued to improve in December 2017 (+7.2% YoY), according to official data. Figure 1: Monthly Value of Retail Sales (VaRS) in Hong Kong - All Categories Figure 2: Monthly Value of Retail Sales (VaRS) in Hong Kong - Jewelry, Watches and Clocks, as well as Valuable Gifts 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jan-2016 Jun-2016 Nov-2016 Apr-2017 Sep-2017 Value of Retail Sales: All Retailer Categories (LHS, HK$m) YoY Change (RHS) Sources: Hong Kong Census and Statistics Department, CGIS Research 13.0% 8.0% 3.0% -2.0% -7.0% -12.0% -17.0% -22.0% 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jan-2016 May-2016 Sep-2016 Jan-2017 May-2017 Sep-2017 Jewelery, Watches and Clocks, as well as Valuable Gifts (LHS, HK$m) YoY Change (RHS) Sources: Hong Kong Census and Statistics Department, CGIS Research 25.0% 15.0% 5.0% -5.0% -15.0% -25.0% -35.0% Figure 3: Selective Figures for HK VaRS in Dec 2017 As Overall Retail Sales YoY Other Consumer Goods: Drugs and Cosmetics 9.13% 11.40% Jewelery, Watches and Clocks, as well as Valuable Gifts 19.41% 6.26% Clothing, Footwear and Related Products 13.77% 5.95% All Retailer Categories 100% 5.78% Sources: Hong Kong Census and Statistics Department, CGIS Research We note that investors have been more cautious about the jewellery category, as some retailers demonstrated weakness in their Q figures. However, based on the official figures, retail sales for jewelry, watches and clocks, as well as valuable gifts was up 6.3% YoY. Other notable outperformers include drugs and cosmetics (+11.4%) and durable goods (+12.3%). So we believe the weakness shown by some retailers is mainly a company-specific problem, not a sector-wide problem. 2

3 Theme: RMB Appreciation a Blessing for the Hong Kong Retail Market RMB and Hong Kong Retail Sales Closely Related The recent appreciation of the RMB (or weakness in the USD) has drawn the attention of many investors. Since January 2017, the RMB has appreciated more than 10% against the HKD. We believe this provides opportunities for the Hong Kong retail sector, at least in the near term. We therefore expect news flow related to retail sales in Hong Kong during Chinese New Year to be more positive. A stronger RMB = relatively cheaper goods in HK We have observed that the positive correlation between the RMB exchange rate and retail performance in Hong Kong has strengthened since the recent down cycle ( ). This means that compared to cycles before 2014, the performance of the RMB vs. HKD will have a more meaningful impact on retail sales in Hong Kong. The stronger RMB makes goods sold in Hong Kong relatively cheaper than in the Mainland, which helps attract more buying by Mainland visitors. Figure 4: RMB against HKD and YoY Change of Hong Kong Retail Sales % % % % % % % % % % % Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 RMBHKD (LHS) Hong Kong Retail Sales Value YoY The anti-graft campaign in the Mainland makes tourists more price/fx sensitive In our view, the close relationship between the RMB exchange rate and Hong Kong retail sales can be attributed partly to the central government s anti-graft campaign, which has intensified since 2014 and has depressed demand for lavish spending. The result is that the retail market in Hong Kong is now more mass-market driven, and consumers have become more price-sensitive. The weaker RMB in early 2014 was a traumatic blow to Hong Kong retail, as Mainland tourists were more reluctant to shop in Hong Kong. However, the RMB has strengthened since Dec 2016, and this has helped drive retail sales in Hong Kong. 3

4 Other Macro Data Also Suggests Better HK Retail Sales While the RMB exchange rate is one of the critical factors driving Hong Kong s retail performance, other macro data is also worth monitoring. As some of this macro data is released ahead of Hong Kong s official retail sales figures (usually a month), we believe this data could be indicative of overall Hong Kong retail sales performance. Macau Gaming: a Strong Start in Jan 2018 Figure 5: Macau Monthly GGR & Hong Kong Retail Sales Value YoY Change 50% 40% 30% 20% 10% 0% 10% 20% 80% 60% 40% 20% 0% 20% 40% 30% 60% Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 Hong Kong Retail Sales Value YoY Macau Monthly GGR YoY (RHS) Macau mass market GGR is closely related to HK retail As Figure 5 suggests, the performance of Hong Kong retail sales is closely related to Macau gross gaming revenue (GGR), since Hong Kong retail sales and Macau gaming are now both driven mainly by Mainland tourists. Mainland tourists often visit both places during their vacations, as visas are still required. However, the recent recovery in Macau GGR was driven more by the VIP segment, while the recovery in the mass market has been slower. We believe the performance of mass market segment provides a better indication of overall retail sales in Hong Kong. This may explain why the recent recovery in Hong Kong retail sales has been slower than the recovery in Macau GGR. But we can still see a positive correlation between the two data sets. Macau gaming revenue recorded strong growth in January 2018, as it was up 36.4% YoY to MOP26.26 billion, much higher than expectations of 27-30% growth. This may also suggest an encouraging performance for Hong Kong retail market. But as the recent recovery of Macau GGR was more driven by VIP revenue, the potential boost to Hong Kong retail sales driven by the exceptionally strong Macau GGR performance may be less impressive. 4

5 Hong Kong PMI: a Leading Indicator Worth Watching As we mentioned previously, since there is a delay in the data released by Hong Kong Census and Statistics Department, investors may also pay attention to other leading indicators. Figure 6 suggests a close relationship between the performance of Hong Kong retail sales and the Nikkei Hong Kong PMI. This should come as no surprise since the retail segment has become an important pillar of the Hong Kong economy. Figure 6: Nikkei Hong Kong PMI & YoY Change of Hong Kong Retail Sales Value 55.0% 45.0% 35.0% 25.0% 15.0% 5.0% 5.0% 15.0% % 44 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 Hong Kong Retail Sales Value YoY Nikkei Hong Kong PMI (RHS) The Nikkei Hong Kong PMI has posted figures above 50.0 since April 2017, except for August The latest figure for January 2018 was 51.1, down slightly from December 2017 s A reading above 50.0 indicates economic expansion, so the recent data suggests the retail recovery has contributed to a more solid economy in Hong Kong. We believe this could lead to a virtuous cycle, in which local residents benefit from stronger economic performance and spend more in the local retail market. 5

6 Wealth Effect: Going Beyond Hong Kong As Figure 7 suggests, the rally of the Hang Seng Index has been closely correlated with the performance of Hong Kong retail sales. The Hong Kong stock market was one of the best performing markets in the world in 2017, and the strong performance was sustained in January. While the Hang Seng Index has undergone a correction since late January 2018, the benchmark index was still up >30% year on year. One of the reasons the Hong Kong equity market has excelled is RMB appreciation, which has made Hong Kong stocks denominated in HKD more appealing to Mainland investors. We believe the wealth effect created from the strong Hong Kong stock market could be positive for the Hong Kong retail market as well. Figure 7: Hang Seng Index & YoY Change of Hong Kong Retail Sales Value 35, ,000 25,000 20,000 15,000 10, Hang Seng Index Hong Kong Retail Sales Value YoY (RHS) The wealth effect will also benefit Mainland investors In the past, the wealth effect was related more to consumption by local residents. However, going forward, as more Mainland investors now participate the Hong Kong stock market via Stock Connect, we believe the wealth effect created in Hong Kong could spill over to the Mainland as well. This will in turn drive more Mainland tourist arrivals and retail sales in Hong Kong, in our view. 6

7 Investment Ideas ased on the leading indicators shown above, we expect the performance of Hong Kong retail sales to be favourable in early The Chinese New Year holiday in February (starting 16 February 2018) will be a key period to watch. Jewellery Retailers In general, the appreciation of the RMB will have a more neutral impact on jewellery retailers than on other retailers. As Figure 8 shows, the correlation between RMB/HKD exchange rate and sales of jewellery and related products is lower than that of overall retail sales in Hong Kong (Figure 4). Figure 8: RMB against HKD and YoY Change of Retail Sales of Jewellery, Watches and Clocks, as well as Valuable Gifts % 60.0% 40.0% 20.0% 20.0% 40.0% % Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 RMBHKD (LHS) YoY Change of Value of Retail Sales: Jewelery, Watches and Clocks, as well as Valuable Gifts 0.0% RMB appreciation may have an impact on bullion products...but is more positive for gem sets and watch products A critical reason for the difference is that precious metals are usually priced according to the international prices, and they are reviewed daily. The appreciation of the RMB is usually associated with a weakening USD, and this usually translate into higher bullion prices. So non-investment-related demand for bullion products may be suppressed by rising bullion prices. This was also a comment made by retailers for their operating performance in Oct-Dec However, for gem sets and watches, the impact of RMB appreciation is usually more positive and noticeable. Since the pricing of these products is usually less frequent (say monthly), RMB appreciation will make the products sold in Hong Kong and priced in HKD more appealing to Mainland visitors. 7

8 RMB appreciation will also have a positive impact on Hong Kong-based retailers with exposure in the Mainland, mainly through the translation effect. Among the jewellery companies under our coverage, the impact on Chow Tai Fook [1929.HK; HOLD] is the most positive, as Chow Tai Fook has higher revenue and profit exposure in the Mainland. Figure 9: RMB Sensitivity of Jewellery Retailers Company Financial Year Year Ended Sources: Company, CGIS Research estimates Sensitivity Test Used Impact on NPAT as % of Latest Financial Year's NPAT Chow Tai Fook FY March RMB appreciates 2% +HK$70m +2.29% Luk Fook FY March RMB appreciates 5% +HK$0.35m +0.03% Stock Ideas: We believe the appreciation of the RMB on the whole will have slightly positive impact on Hong Kong-based jewellery retailers under our coverage, namely Chow Tai Fook, Luk Fook [590.HK; HOLD] and Chow Sang Sang [116.HK; BUY]. While gold sales may be affected, the stronger gem set sales may partly compensate. In addition, the increasing number of visitors from the Mainland should be positive for traffic flow to stores in Hong Kong. While tourists may continue to consider other countries for overseas shopping, the geographical proximity of Hong Kong is still the prime factor for wealthy southern Chinese consumers. For investors who prefer to chase the recovering demand for luxury watches, a purer play such as Emperor Watch & Jewellery [887.HK; NOT RATED] or Orient Watch Holdings [398.HK; NOT RATED] may worth monitoring. They have approximately 80% and 100% exposure to the luxury watch segment, respectively. 8

9 Cosmetics Retailers Based on the official statistics released by the Hong Kong Census and Statistics Department, we notice that the category Drugs and Cosmetics has been an outperformer in terms of the YoY change of value of retail sales (Figure 3 and Figure 10). We believe this also presents investment opportunities. Figure 10: RMB against HKD and YoY Change of Retail Sales of Drugs and Cosmetics % % % % % % % % % % Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 RMBHKD (LHS) YoY Change of Value of Retail Sales: Drugs and Cosmetics As cosmetics and related products are usually frequently consumed items, they are also more price-sensitive, especially for consumers in the mass market segment. The VAT and import taxes in the Mainland have generally made products sold in the Mainland more expensive than in Hong Kong. We therefore believe the appreciation of the RMB has made products sold in Hong Kong even more appealing to price-sensitive Mainland visitors. Stock Ideas: We see Sa Sa International [178.HK; NOT RATED] as a major beneficiary under this category, as the Company is the leader in this specialty retailing. More than 80% of the Company s revenue is from Hong Kong, and we think the operating leverage could improve. 9

10 Investment Risks (1) Exchange Rate Risk. Although the RMB has appreciated considerably against the HKD since early 2017, the RMB may depreciate unexpectedly and jeopardize our investment thesis. The source of depreciation, for example, may include worsening macroeconomic data in China, stronger-than-expected tightening of monetary policy by the US Federal Reserve, or intentional depreciation by the People s Bank of China to promote exports. (2) Company-specific Risks. While the overall retail sector in Hong Kong has witnessed improvement since late 2016, and the recovery has been partly facilitated by the appreciation of the RMB against the HKD, some retailers may fail to seize the opportunity to ride on the recovery. This may be due to company-specific reasons, such as lesscompetitive products, high prices or ineffective marketing campaigns. Figure 11: Sector Peer Comparison Company Ticker Trading Price Mkt Cap PER(x) PBR(x) ROE(%) Div YIeld(%) Currency US$m FY0 FY1 FY2 FY0 FY1 FY2 FY0 FY1 FY2 FY0 FY1 FY2 Our Coverage Chow Tai Fook Jew ellery 1929 HK HKD , Luk Fook Holdings Intl Ltd 590 HK HKD , Chow Sang Sang Hldg 116 HK HKD , Simple Average Peers Listed in Hong Kong Sa Sa International Hldgs 178 HK HKD , Emperor Watch & Jew ellery 887 HK HKD Hengdeli Holdings Ltd 3389 HK HKD Oriental Watch Holdings 398 HK HKD Tse Sui Luen Jew ellery Intl 417 HK HKD Simple Average Peers Listed in A-share Lao Feng Xiang Co Ltd-A CH RMB , Shanghai Yuyuan Tourist-A CH RMB , Eastern Gold Jade Co Ltd-A CH RMB , Chow Tai Seng Jew ellery Co CH RMB , Guangdong Chj Industry Co-A CH RMB , Zhejiang Ming Jew elry Co-A CH RMB Simple Average International Peers LVMH Moet Hennessy MC FP EUR , Cie Financiere Richemont CFR SW CHF , Tiffany & Co TIF US USD , Pandora A/S PNDORA DC DKK , Signet Jew elers Ltd SIG US USD , Simple Average Sources: Bloomberg, CGIS Research estimates for covered stocks 10

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