We have turned more positive on HK retail sector. Decent risk reward has raised as we expect 2020 outlook to turn better, supported by 1) better tourist flow, 2) lower chance for RMB depreciation, potential rental costs easing and 3) attractive valuation.
- HK retail sales down 24% YoY in Nov 2019, similar to Oct 2019. HK retail sales fell by 23.6% YoY in Nov 2019, one of the largest drop in HK history, but did improve mildly from -24.4% YoY in Oct 2019, in-line with BBG est. of -24.6% but slightly worse than CMBI’s est. of -21.0%. We believe the decline was a result of: 1) deterioration of tourists flow and 2) suppressed HK local demand due to recent social unrest.
- Demand from both tourists and locals remained weak. Visitors to HK continued to tank by 56% in Nov 2019, implying no recovery from 44%/ 34% YoY decline in Oct/ Sep. By tourists and locals, the negative trend continued with sales decline of 36% and 18% in Nov 2019 (vs 36% and 19% in Oct). In terms of category, jewelry, department stores, medicine & cosmetics and clothing & footwear are still among the worst, with sales decline by 44%, 33%, 33% and 32%. All were worsened (except clothing) vs last month. On the other hand, category like F&B, auto & parts and supermarket, are the only few with improvement to -11%, -12% and 3% (vs -12%, -19% and +1% in Oct).
- Retail sales growth may stabilize and turnaround in 2020E. We now expect HK retail sales to at least stabilize with 22%/ 18% YoY decline in Dec 2019/ Jan 2020 (vs 24% drop in Nov 2019), thanks to slightly better tourists flow during Christmas (-53% YoY) and New year (-29% YoY), plus the earlier CNY timing in 2020. We also expect low chance of further RMB depreciation in 2020 (RMBHKD is at 1.11 in Dec 2019), since it is close to the lowest level in last 9 years and a potential trade deal may be signed between US and China soon. Furthermore we now expect retail sales to drop less in 2Q20E and turn positive in Aug 2020E, mainly due to low base, and forecast retail sales to drop by 10.1% in 2020E (vs -11.3% in 2019E), by monthly seasonality.
- Rental costs may drop further in 2020E. According to HK Rating and Valuation Department, private retail rents started to fall since Jul 2019 and by 6% on average in Oct 2019. We think street level rental fees could retreat more and retailers can save more by closing or relocating stores in FY20E.
- Actionable ideas: Lifestyle (1212 HK), CDC (341 HK), I.T (999 HK) and SaSa (178 HK). In terms of valuation, we find lifestyle (1212 HK), CDC (341 HK) and I.T (999 HK) undemanding, as these are all trading at 1.s.d below historical P/E mean. According to CMBI est. and Bloomberg, I.T (999 HK) Lifestyle (1212 HK) CSS (116 HK), CTF (1929 HK), CDC (341 HK), SaSa (178 HK) now have 8%, 7%, 6%, 5%, 5% and 4% forward 2 years dividend yield. In terms of ability to maintain a fixed amount of dividend (even with short-term NP volatility), we would prefer SaSa (178 HK), I.T. (999 HK) and CDC (341 HK). In terms of rental costs savings, we do like SaSa (178 HK) and luxury retailers such as Oriental Watches (398 HK) due to their plan to adjust rental costs by closing down or relocating stores in tourists area. We expect rental income pressure for landlords like Wharf REIC (1997 HK), and hence may drag future earnings growth.
