China / Hong Kong Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 8 May 217 Encouraging signs HK retail sales for Mar 217 beat expectations, along with progressive recovery of PRC visitor numbers. There is no guarantee of a smooth, positive growth throughout the coming months amid seasonality impacts (e.g. Easter holidays) and forex fluctuations. Yet, we stay optimistic for 8M17, in the least, given the low base and possible cost benefits. Jewellery & watch retailers as well as the cosmetics segments that tap Mainland tourist consumption significantly should be biggest beneficiaries. Maintain BUY on Chow Sang Sang, Luk Fook and Sa Sa. Retail sales growth posted positive surprise. Following 24 months of consecutive declines, recently announced HK retail sales for Mar 217 rebounded by 3.1%, beating market expectations of over 1% decline. For 1Q17, provisionally estimated HK retail sales decreased 1.3% (2M17: down 3.2%). Re-rating catalysts. In the next 6 months, we still see potential catalysts that could fuel overall performance of HK retailers. These could include a soft HKD to attract tourist consumption, China s ban of tour groups to S. Korea to redirect Mainland visitors to HK, a low base effect, and possible cost benefits from earlier rental reductions. Relative attractiveness. Amongst local tourist plays, we believe major jewellery & watch retailers could outperform, given their mega low base, Mainland tourists preference to buy hard luxuries in HK, and stronger wedding-related jewellery demand driven by this double spring leap year of 217. Other segments like cosmetics offer lower ticket sizes and blend well with the recovery in HK visitor numbers. We reiterate our BUY recommendation on Chow Sang Sang (116.HK), Luk Fook (59.HK) and Sa Sa (178.HK), and do not rule out further upgrades of our target prices once additional performance data are available. HSI: 24,578 ANALYST Mavis HUI +852 2863 8879 mavis_hui@dbs.com Recommendation & valuation Target 18F Mkt Company Price Price Recom PE Yield Cap Name HK$ HK$ x % US$m J ewelleries Chow Tai Fook# 1929 HK 8.68 n.a. NR 21.1 2.8 11,154 Chow Sang Sang* 116 HK 18.82 19.94 BUY 12.4 3.2 1,637 Luk Fook Hdg*# 59 HK Emperor Watch 887 HK Sa Sa Intl.Hdg.*# 178 HK # FY18: FY19 ^ Under review Source: Thomson Reuters, *DBS Vickers 27.8 29.1 ^ BUY 13.6 3.7 2,99.325 n.a. NR 23.2 2.8 287 3.32 3.61 BUY 22.3 4.9 1,277 sa- CW ASIAN INSIGHTS VICKERS SECURITIES
A nice surprise Retail sales resumed growth. Following 24 months of consecutive declines, latest HK retail sales for Mar 217 rebounded, up 3.1% y-o-y to HK$35.7bn, beating market expectations of over 1% decline. Such performance should be attributable to better tourist consumption following a weaker HKD, seasonality impacts from Easter Holidays that fell in April this year (instead of Mar in 216 so that local consumers did not travel as much in Mar 217), as well as China's ban on tour groups visiting Korea since early Mar 217 that brought a 4% plunge in Chinese visitor numbers to S. Korea (source: Korea Tourism Organisation). For 1Q17, provisionally estimated HK retail sales decreased 1.3% (2M17: down 3.2%). Potential catalysts in next 6 months. At present, we believe some positive drivers could linger in the coming months to fuel overall performance of HK retailers. (1) Ascending forex rates vs. RMB across most overseas currencies, including major PRC tourist destinations like Japan (+1% vs. RMB), S. Korea (+2%), Thailand (+3%), Malaysia (+3%), Taiwan (+3%), Euro Zone (+3%), UK (+5%), etc. over the past 3 months. While the exchange rate of RMB to HKD has become more stabilized, Mainland tourists should continue to see the relative attractiveness of HK for shopping and vacation. (2) China s worsening relations with S. Korea could also help diverting Mainland visitors to HK for short trips. For instance, Chinese tourists bookings of 4-8 nights to S. Korea for 2Q17 are 28% lower than the same period last year (source: ForwardKeys, 26Apr17). On the other hand, the number of PRC visitors coming to HK increased by c.18% during the Labour Day Holidays of 29 Apr - 1 May 217, revealing an accelerated growth trend (Mar17: up 1.8%; 2M17: up 3.8%). All these could indicate possible shifts of Chinese tourists from S. Korea to HK. (3) A low base effect, especially given that Apr-Aug 216 registered strong declines in HK retail sales ranging from -7.5% to -1.5%. HK retail sales growth 1% 5% % -5% -1% -15% Low-base effect Jan-Feb 216 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-Feb 217 Mar-17 (4) Cost-benefits could be seen, as local rentals that normally renew every 3 years should post a laggard impact. Good efforts of HK retailers to cut rentals over the past 12-18 months could cast bigger improvement in their rental cost ratios should retail sales sustain a better trend. This could enhance operating leverage and retailers profitability could see more room for a recovery. (5) In Mar 217, sales of certain segments that underperformed the most over the past year did achieve relatively bigger rebounds: jewellery, watches & clocks registered 8.4% growth, as compared to cosmetics & medicines (up 3.5%), as well as wearing apparels (up 2.5%) that could also be affected by a warmer weather this year. Specifically, the jewellery, watches & clocks segment was among the worst performer last year, and could likely see better sales growth in 217 against most other segments. Jewellery retailers could also ride on 217 to secure more wedding-related businesses, as it is the double spring leap year according to the Lunar Year Calendar that should entice more marriages in Greater China. Page 2
HK retail sales growth by category (216) 5% % -5% -1% -15% -2% -25% -17.2% -2.9% Consumer Durable Goods* Jewellery, Watches, Clocks & Valuable Gift -6.2% -4.6% Department Stores Clothing, Footwear & Allied Products -.4%-.1%.8% 1.7% -8.1% * Consumer durable goods include motor vehicles & parts, electrical goods & photographic equipment, furniture & fixtures, etc. Other Consumer Goods^ Medicines & Cosmetics Supermarkets Food, Alcoholic Drinks & Tobacco Total Key tourists plays in HK to benefit. While the market has been expecting some recoveries for major local retailers this year and continues to price-in such a trend, we could see further room to re-rate leading tourist plays. In particular, major local jewellery & watch retailers could outperform, given (1) their very low base for 217, (2) strong brand awareness amongst Mainland tourists, with their preference to buy hard luxuries in HK given better pricing and confidence on product quality, and (3) their high level of wedding-related sales (>4-5% even in normal years). So far, leading jewellery retailers have resumed solid growth in 1Q17. We believe Emperor Watch & Jewellery (887.HK) also targets at a high single-digit to c.1% revenue growth this year. Other segments like cosmetics offer lower ticket sizes, and could also ride on the rebound in visitor numbers to HK to see better revenue performance. We reiterate our BUY recommendation on Chow Sang Sang (116.HK), Luk Fook (59.HK) and Sa Sa (178.HK), and do not rule out further upgrades of our target prices once additional performance data are available. ^ Other consumer goods include books, newspapers, stationery & gifts, Chinese drugs & herbs, optical shops, etc. Chow Tai Fook PE band PB band 3 25 2 15 1 5 Dec-11 Jun-12 Nov-12 May-13 Nov-13 Apr-14 Oct-14 Apr-15 Sep-15 Aug-16 Feb-17 33x 28x 22x 17x 11x 2 18 16 14 12 1 8 6 4 2 Dec-11 Jun-12 Nov-12 May-13 Nov-13 Apr-14 Oct-14 Apr-15 Sep-15 Aug-16 Feb-17 4.7x 3.8x 3.x 2.1x 1.2x Source: Thomson Reuters Page 3
Chow Sang Sang PE band PB band 7 6 5 4 3 2 1 Jan-99 Mar-2 May- 5 Jun-8 Aug- 11 Oct-14 Dec-17 35x 27x 19x 11x 3x 5 45 4 35 3 25 2 15 1 5 Jan-99 Mar-2 May-5 Jun-8 Aug-11 Oct-14 Dec-17 3.1x 2.4x 1.7x 1.x.3x Source: Thomson Reuters, DBS Vickers Emperor Watch & Jewellery PE band PB band 1. 9. 8. 7. 6. 5. 4. 3. 2. 1.. Jul-8 Nov-8 Mar-9 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Jul-16 Nov-16 Mar-17 Jul-17 93x 71x 48x 25x 3x 2.5 2. 1.5 1..5. Jul-8 Nov-8 Mar-9 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Jul-16 Nov-16 Mar-17 Jul-17 3.x 2.3x 1.6x.9x.3x Source: Thomson Reuters Page 4
Luk Fook PE band PB band 7 6 5 4 3 2 1 19x 16x 12x 8x 4x 8 7 6 5 4 3 2 1 4.5x 3.6x 2.7x 1.8x.8x 21 213 216 21 213 216 Source: Thomson Reuters, DBS Vickers Sa Sa PE band PB band 12 12 1 1 8 8 11.x 6 4 2 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 33x 25x 18x 11x 4x 6 4 2 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 8.5x 5.9x 3.4x.8x Source: Thomson Reuters, DBS Vickers Page 5
Hong Kong retail sales (monthly) Hong Kong retail sales (annual) HKD bn % 1, 8, 6, 4, 2, Jan-Feb 11 Jul-11 Dec-11 Jun-12 Nov-12 May-13 Oct-13 Apr-14 Sep-14 Mar-15 Aug-15 Jan-Feb 16 Jul-16 Dec-16 Hong Kong Retail Sales (LHS) 35 3 25 2 15 1 5 (5) (1) (15) (2) YoY growth (RHS) HKD bn 6 24.9% 3% 494 493 18.3% 475 46 445 25% 5 437 2% 4 325 15% 3 275 1% 2.6% 9.8% -.2% 11.% 5% -3.7% % 1-8.1% -5% -1% 29 21 211 212 213 214 215 216 Hong Kong Retail Sales (LHS) YoY growth (RHS) Hong Kong retail sales breakdown Retail sales grow th (YoY, %) Categories 1H1 2H1 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 3M17 Jewellery, Watches, Clocks & Valuable Gift 37.4 34.9 5.4 43.3 11.8 3.9 32.6 13.5 (16.7) (1.2) (15.9) (15.2) (21.1) (13.2) 1.4 Clothing, Footwear & Allied Products 16.1 18.4 27.8 28.2 11.5 4.1 9.8 6.8 8.1.1 (3.6) (1.1) (7.8) (.9) (4.1) Consumer Durable Goods 27.3 26.5 26.7 3.2 27.7 12.7 1.9 (3.8) (3.5) 8.6 12.3 (.1) (24.1) (17.4) (11.) Department Stores 18.1 15. 2.3 22.8 1.8 8.7 19.9 15.9 3. (.2) (1.) (7.) (9.) (3.4) (1.2) Other Consumer Goods 11.6 14.2 17.1 18. 1.6 7.4 1.4 8.2 6.6 6.1 (.8) (5.) (2.1) 1.5 4.3 Fuels 1.8 9. 15.1 14.4 6..9 1.5 (1.2) (.9) (1.9) (12.5) (8.5) (1.6).7 7.3 Supermarkets 2.9 8.2 1.9 13.9 12.6 8.1 7.2 6.4 6. 3.2 1.1 1.5 1..6 (1.9) Food, Alcoholic Drinks & Tobacco 11.5 7.8 5.8 8.6 3.1 2.6 2.4 4.5 7.1 6.1 7.9 4. 1.2 2.2 1.9 Medicines & Cosmetics 15.4 2.6 22.3 2.8 17. 13.1 13.2 1.6 8.4 1.2.9 (4.9) (1.6) 1.7 3.1 Retail Sales V alue 17.9 18.7 24.4 25.3 13.1 6.8 15. 7.1 (1.3).8 (1.6) (5.8) (1.5) (5.5) (1.3) Hong Kong retail sales breakdown (monthly) Jan- Feb 16 Retail sales grow th (YoY, %) Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 J an- Mar-17 Feb 17 Cat egories Jewellery, Watches, Clocks & V aluable Gift (24.2) (2.4) (16.5) (18.6) (2.4) (26.2) (26.5) (12.3). (14.5) 2.3 (1.2) 8.4 Clothing, Footwear & Allied Products (1.7) (1.3) (5.9) (5.8) (.8) 1.4 (4.5) 1.7 (3.5) 3.8 (3.7) (6.6) 1.7 Consumer Durable Goods (26.1) (22.7) (2.9) (22.) (26.1) (19.1) (23.8) (9.2) (14.1) (18.) (2.2) (15.5) (1.4) Department Stores (12.3) (5.4) (6.9) (5.9) (1.5) (6.9) (1.8) (2.4) (.8) 1.7 (2.9) (1.7).1 Other Consumer Goods (6.5).4.2 (1.2) 2.8 4.8.2 1.2 (.5) (1.1) 3.5 3.9 5.4 Fuels.1 (2.) (1.1) (2.1) (3.9) (1.9) (6.1) 1.3 5.6 2.4 3.6 6.4 9.1 Supermarkets.2. 2.3 1.5 1.9 1.9 (1.) (.4) 3.5 (1.1).7 (3.9) 2.6 Food, Alcoholic Drinks & Tobacco (1.9) 2.4 4.9 3. 2.9 1.3 8.8 (3.1) 1.2.9 5.2 1.5 2.9 Medicines & Cosmetics (7.6) 1.5 1.7.2 5. 9.1 (.9) 1.2 (1.8) (3.) 4.8 3. 3.5 Retail Sales V alue (13.6) (9.8) (7.5) (8.3) (8.9) (7.7) (1.5) (4.) (2.9) (5.4) (2.9) (3.2) 3.1 Page 6
Currency performance (vs. CNY) Currency performance (vs. HKD) Performance (%) 1-mth 2-mth 3-mth 6-mth vs. CNY KRW. 1.7 1.7 3.4 MYR 2.2 2.6 3. (1.) TWD 1. 2.4 3. 6.3 SGD (.2).3 1.2.4 JPY (1.8) 1..7 (6.7) EUR 3.2 3.4 2.8.7 GBP 4.1 5.5 4.8 5.7 AUD (1.9) (2.4) (2.6) (1.4) USD.1.1.6 1.9 HKD (.1) (.4).5 1.6 Source: Bloomberg Finance L.P. Performance (%) 1-mth 2-mth 3-mth 6-mth vs. HKD KRW (1.4) 1.5.. MYR 2.4 3. 2.4 (2.6) TWD 1.2 2.8 2.5 4.7 SGD (.1).6.7 (1.2) J PY (1.6) 1.4.2 (8.2) EUR 3.3 3.8 2.3 (.9) GBP 4.2 5.9 4.3 4.1 AUD (1.8) (2.1) (3.1) (3.) USD.2.2.3.4 CNY.1.4 (.4) (1.6) Source: Bloomberg Finance L.P. Tourist arrivals to HK 15% 1% 5% % -5% -1% -15% -2% -25% -3% Jan-16 Feb-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Total tourist arrivals growth Chinese tourist arrivals growth Page 7
DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>2% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >1% for large caps) HOLD (-1% to +15% total return over the next 12 months for small caps, -1% to +1% for large caps) FULLY VALUED (negative total return i.e. > -1% over the next 12 months) SELL (negative total return of > -2% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 8 May 217 14:27:4 (HKT) Dissemination Date: 8 May 217 18:2:33 (HKT) Sources for all charts and tables are DBS Vickers unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSVHK ). This report is solely intended for the clients of DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd. 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ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests 2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended/mentioned in this report as of 5 May 217. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. 4. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 9
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