Share price correction of ~15% for Consumer Disc. sector since its peak in Jan had priced in certain negatives (CMBI est. ~1 month impact on sales and profit), further downside is less now, prefer exports, manufacturing and home appliances.
- Negative for Consumer Discretionary, data points for 1Q20E would be the overhangs. Due to the outbreak of virus, its subsequent measures (e.g. Quarantine of Wuhan city) and discouragement on social activities had significantly reduced travelling and consumer spending. Moreover, such impact was unfortunately amplified by the CNY Golden Week, where sales during these 2 weeks could roughly accounted for 5-10% of full year revenue for a typical consumer stock. Hence, absence of this revenue plus fixed costs would certainly lead to cuts in earnings. We now expect China retail sales growth to be soft in Jan 2020 (CMBI est. of 5-6% increases only) and a meaningful slowdown in Feb 2020 (CMBI est. of 5-10% decline).
- How long is the retail drag? It was 2 months for SARS, and an average share price correction of 15% should provide a reasonable buffer. Major drag on China retail sales during the SARS period lasted for ~2 months (Apr-May 2003). If the number of infections this time is to be peaked out in 1-2 months (at ~Feb or Mar 2020), then net profit cut due to temporary pause in operations and purchases, in our view, would be about 15-25% (10-15% sales cut and 5-10% extra costs, mostly labour and D&A while rental could be eased). We believe net profit cut had become more bearable by investors, especially after recent share price correction (Average Consumer discretionary names down by 14.8% from its peak in Jan). Noted that HSCEI and MSCI China corrected by 10% and 18% respectively in the SARS period.
- Negative impact magnitude by nature: 1) Online < Offline, 2) Wholesale < Direct retail, 3) Overseas < Domestics. With physical interactions reduced to minimal, consumer should have shifted their consumption demand to online. Hence we expect e-commerce sales to remain quick (if not accelerate) in Jan-Feb 2020, benefiting names such as JS Global (~50% for Joyoung and ~30% for SharkNinja), Li Ning (~20%), Bosideng (~20%), etc. Also, while direct retail stores being hit hard the most, brand owners with wholesale nature and directly owning its e-commerce could be less affected, benefiting names with higher wholesale & online mix, like Yihai, Li Ning, Xtep, Anta vs others. Additionally, those with the high exposure to overseas, should be affected the least, such as Shenzhou, JS Global, Samsonite and Prada.
- Prefer exporting & manufacturing and home appliances & furniture (less negative in earnings cut). This could be a good time for quality companies to outperform, including Shenzhou (2313 HK, NR), Yihai (1579 HK, NR), JS Global (1691 HK, BUY), Haier Smart Home (600690 CH, NR), Joyoung (002242 CH, NR), Anta (2020 HK, BUY), Li Ning (2331 HK, BUY), Man Wah (1999 HK, NR), Samsonite (1910 HK, NR), etc..
