Equity Research Consumer Discretionary May 4, 218 HK Retail Sector Monthly March retail sales jump 11.2%; momentum continued into April and Labor Day holiday Albert Yip, CFA SFC CE No. ADT599 albertyip@gfgroup.com.hk +852 3719 11 GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong HK retail sales jump 11.2% in March The growth was driven by 1 growth in mainland visitor arrivals, but was down slightly from 15.7% in 2M18 given the lower base in 2M17, the later CNY holiday this year and the cold weather in 2M18. Food retail sales growth dropped from % (CNY holiday related) in 2M18 to 4. in March. Apparel sales growth slowed from 19.3% (cold weather in 2M18) to 11.6% in March. However, we did not see a sales slowdown in mainland-visitor-preferred categories in March such as jewelry (+23.1% in March vs +21.2% in 2M18), cosmetics (+16.5% in March vs +17. in 2M18) and department stores (+17.7% in March vs +11.3% in 2M18). Strong tourist numbers during Labor Day holiday According to data from the HK Immigration Department, mainland visitor arrivals increased by 22.2% YoY to around 599, during April 29 May 1, 218. The growth was higher than last year s 3.7%, and better than the 13% growth in 1Q18 and 14.5% growth during the 218 CNY Golden Week holiday. Stock performance 4 HK retail sector 3 2 1 HSI Jewelry sales momentum continued during April and Labor Day holiday According to our channel checks, Chow Sang Sang (116 HK, Hold) saw teen-level SSSG in HK & Macau during April and low-teens growth during the Labor Day holiday. The momentum did not slow compared to low-teens growth in 1Q18. We expect Chow Tai Fook (1929 HK, Buy) and Luk Fook (59 HK, Accumulate) to see their momentum in 1Q18 continue into April and the Labor Day holiday, and still think consensus underestimates their FY18 earnings. Since we upgraded our ratings for Chow Tai Fook and Luk Fook on March 12, their share prices have increased by 14% and 2, respectively, and have outperformed the HSI (-2%). Outlook Most members of the HKRMA anticipate retail sales growth of mid single-digit to low double-digit during the Labor Day holiday. Supported by a strong renminbi and tourist growth, the HKRMA raised its 218 retail sales growth forecast from 5-6% to high single-digit growth. We believe HK retail sales could maintain momentum in 2Q18 thanks to strong the renminbi and a low base. We maintain our Buy rating on I.T (999 HK) and Chow Tai Fook, and our Accumulate rating for Luk Fook. -1 May-18 Source: Bloomberg, GF Securities (Hong Kong) Note: HK retail sector performance is a simple average of the share price performance of the eleven stocks mentioned in the valuation table. Key data 1M % Chg YTD % Chg Chow Tai Fook 9. 22.2 Luk Fook 12.2 (2.4) Chow Sang Sang 4.8 (8.9) Emperor Watch 22.9 43.7 Stelux () 18.2 Oriental Watch 13.7 44.9 Lifestyle 9.1 45.1 Sa Sa Int'L 16.2 67.1 Bonjour Hldgs 47.3 22.2 Trinity 2.6 2.6 I.T Ltd 5.1 18.6 Average 7. 15.3 Source: Bloomberg Stock valuation Price TP Mkt Cap P/E (x) EPS growth Revenue growth Yield P/B (x) ROE Ticker Rating (May 3 218) (HK$) (HK$ m) FY17 FY18E FY17 FY18E FY17 FY18E FY17E FY18E FY17E FY18E FY17E FY18E Chow Tai Fook # 1929 HK Buy 1.2 1,2 21.9 2.2 5 9 14 7 2.3 3.1 2.8 14.2 14.6 Luk Fook # 59 HK Accumulate 32.75 33.2 19,228 15. 12.8 26 17 12 9 3.4 3.4 2. 1.9 13.9 15. Chow Sang Sang 116 HK Hold 17.2 17.2 11,651 15.7 13. () 21 3 9 2.7 3. 1.1 1.1 7.7 8.6 Emperor Watch 887 HK NR.51 na 3,51 22.2 na (356) na 12 na na na.8 na 3.7 na Stelux # 84 HK NR.65 na 68 na na na na na na na na na na na na Oriental Watch # 398 HK NR 8 na 1,472 na na na na na na na na na na na na Lifestyle 1212 HK Accumulate 15.6 24,135 7.3 13.2 18 (45) 5 7 4.2 4. 6. 4.8 111.9 44. Sa Sa Int'L # 178 HK NR 5.3 na 15,285 36.2 26.1 24 39 5 7 2.6 3.6 6.9 6.7 19. 25.8 Bonjour Hldgs 653 HK NR.33 na 1,126-5.6 na na na na na na na na na -27.1 na Trinity 891 HK NR.78 na 2,85-2.2-6.5 38 (66) (4) 12. na.6.6-25. na I.T Ltd * 999 HK Buy 3.95 5.22 4,723 11.4 9. 34 26 6 8 4. 5. 1.4 1.3 13.1 15. Average 13.5 1 (1) 6 8 2.8 3. 2.7 2.7 14.6 Sources: Bloomberg estimates, GF Securities (Hong Kong) estimates * Company year ends in Feb # Company year ends in March
25 26 27 28 29 21 211 212 213 214 215 216 217 3M218 Sector report May 4, 218 Figure 1: HK s mainland Chinese tourist arrivals (monthly) Figure 2: Macau s mainland Chinese tourist arrivals (monthly) No. of mainland tourist arrivals (LHS) 5. 5 4.5 4 4. 3 3.5 2 1 3. -1 2. -2-3 No. of mainland tourist arrivals (LHS) 2. 1. 5 4 3 2 1-1 -2-3 Sources: HKTB, GF Securities (Hong Kong) Sources: Statistics and Census Service of Gov t of Macau SAR, GF Securities (Hong Kong) Figure 3: HK s mainland Chinese same-day tourist arrivals (monthly) Figure 4: HK s mainland Chinese overnight tourist arrivals (monthly) No. of sameday tourist arrivals (LHS) No. of overnight tourist arrivals (LHS) 3.5 3. 2. 1..5 5 4 3 2 1-1 -2-3 -4 2. 1..5 4 3 2 1-1 -2-3 Sources: HKTB, GF Securities (Hong Kong) Figure 5: HK s inbound mainland Chinese tour groups (monthly) Figure 6: HK s mainland Chinese tourist arrivals (yearly) No. of Mainland tourist groups (LHS) No. of mainland tourist arrivals (LHS) 15, 1, 5, 12 1 8 6 4 2-2 -4-6 -8 5 45 4 35 3 25 2 15 1 5 3 2 1-1 Sources: Travel Industry Council, GF Securities (Hong Kong) Sources: HKTB, GF Securities (Hong Kong) 2
Sector report May 4, 218 Figure 7: Japan s mainland Chinese tourist arrivals (monthly) 1..9.8.7.6.5.4.3.2.1 18 16 14 12 1 8 6 4 2 Figure 8: Japanese yen vs the renminbi (monthly) Exchange rate (JPY per Rmb) 21 2 19 18 17 16 15 14 Sources: JNTO, GF Securities (Hong Kong) Sources: Bloomberg, GF Securities (Hong Kong) Figure 9: Korea s mainland Chinese tourist arrivals (monthly) Figure 1: Taiwan s mainland Chinese tourist arrivals (monthly) 1..9.8 3 25 2.6.5 6 4.7.6.5.4.3.2 15 1 5-5.4.3.2 2-2 -4.1-1.1-6 Sources: Korea Tourism Organization, GF Securities (Hong Kong) Sources: Tourism Bureau of Taiwan, GF Securities (Hong Kong) Figure 11: Singapore s mainland Chinese tourist arrivals (monthly) Figure 12: Rmb against other Asian currencies since Jan 2, 217.4 1 1.15.3 8 6 4 1.1.2.1 2-2 -4 1..95.9 HKD JPY USD KRW SGD THB Sources: Singapore Tourism Board, GF Securities (Hong Kong) Sources: Bloomberg, GF Securities (Hong Kong) 3
Sector report May 4, 218 Figure 13: HK retail sales growth (YoY) 2 15% 1 5% -5% -1-15% Sources: Hong Kong Census & Statistics Department, GF Securities (Hong Kong) Figure 14: Apparel retail sales growth (YoY) Figure 15: Department store retail sales growth (YoY) 5 4 4 3 2 1-1 -2 3 2 1-1 -2-3 -3 Sources: Hong Kong Census & Statistics Department, GF Securities (Hong Kong) Figure 16: Retail sales growth of jewelry, watches and valuable gifts (YoY) Figure 17: Retail sales growth of cosmetics and medicines (YoY) 4 3 2 1-1 -2-3 -4-5 3 25 2 15 1 5-5 -1-15 Sources: Hong Kong Census & Statistics Department, GF Securities (Hong Kong) 4
Sector report May 4, 218 Figure 18: SSS trend for jewelry companies Calendar Year 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Apr-18 Avg gold price (US$) 1,15 1,181 1,259 1,335 1,217 1,218 1,259 1,279 1,277 1,329 Avg gold price YoY -8% -3% 5% 19% 1 3% -4% 5% 9% SSS trend Chow Tai Fook (1929 HK) -15% -26% na na na na na na na na China -6% -25% -17% -22% 4% 12% 11% 9% 5% 7% HK and Macau -23% -27% -2-3 -2% 4% 5% 13% 5% 17% Luk Fook (59 HK) -25% -27% -24% -37% -1 2% 5% 17% 1% 16% China -1-19% -24% -23% 5% 11% 23% 11% -4% -2% HK and Macau -26% -28% -24% -39% -11% 1% 3% 18% 1% 18% Chow Sang Sang (116 HK) China -11% ------- -ve 5% ----- -ve low to mid-teen mid to high sd high sd high sd mid sd flat low sd -ve lsd HK and Macau -ve high-teen ----- -ve 26% ----- ----- -ve 34% ----- -ve 7% -ve 2-3% -ve 2-3% high sd -ve lsd low-teens teens RSV trend Chow Tai Fook (1929 HK) China -6% -25% -13% -17% 7% 16% 17% 15% 12% 13% HK and Macau -2-26% -22% -33% -6% 1% 7% 12% 11% SSS trend by category Chow Tai Fook (1929 HK) Gold products -14% -27% na na na na na na na na China -3% -29% -22% -27% 7% 17% 16% 15% 8% 14% HK and Macau -24% -25% -12% -36% 8% 19% 9% 21% -1% 18% Gem-set jewellery -12% -23% na na na na na na na na China -7% -24% -12% -17% -4% 5% 3% -1% -1% -8% HK and Macau -16% -22% -27% -23% -17% -17% -4% 7% 22% 16% Luk Fook (59 HK) Gold and platinum products -25% -28% -26% -47% -11% -1% 5% 21% -3% 16% China -14% -27% -29% -3 2% 16% 32% 19% -2% -1% HK and Macau -26% -28% -25% -49% -12% -5% 21% -4% 19% Gem-set jewellery -26% -25% -19% -14% -4% 11% 9% 16% 1 18% China 2% 4% -8% -3% 2 6% 1-2% -7% -2% HK and Macau -27% -27% -2-14% -5% 12% 9% 18% 11% 19% Chow Sang Sang (116 HK) Gold and platinum products China ------- -ve 13% ------- ----- -ve 32% ----- lsd 6-7% low-teens high sd +ve sd positive better than gem-set HK and Macau -49% -ve msd +ve -ve low-teens -ve low-teens Gem-set jewellery China ------------- 8% -------------- 2 low-teens mid-teens +ve lsd -ve mid sd -ve lsd negative HK and Macau better than LF -ve low-teens -ve hsd -ve dd -ve mid sd mid-teens slighty better than gold better than gold Source: Company data, GF Securities (Hong Kong) estimates Note: Chow Sang Sang figures are our estimates. 5
Sector report May 4, 218 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1 Neutral Expected sector relative performance ranges between -1 and 1 Cautious Sector expected to underperform benchmark by more than 1 Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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