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China slowdown weighs on consumer sector shares in H2

(2015-09-01 23:29:21) 下一个

“Do you feel there are fewer people on the street?” my husband suddenly quipped while we were passing by the bustling warrens of Causeway Bay in Hong Kong.

We were used to edging through the jammed streets of Causeway Bay, barely avoiding hitting other peoples’ shoulders or stepping on their feet or getting pushed in the back. That day, it was like strolling in the small garden under our flat.

The sharp decline of visits from mainland Chinese tourists as well as the devaluation of the yuan is an indication that headwinds for some companies in the consumer sector remain strong.

Although footwear brand Belle, chain restaurant Tsui Wah and beauty chain store Sa Sa have seen their share prices drop to their lowest level in 3-5 years, analysts remain negative based on the weak macro economy, rising operational and labour costs.

Official data show retail sales in Hong Kong declined for the fifth straight month in July as a further drop in tourist arrivals and stock market turmoil exacted a toll on consumption.

“The first half results show the consumer companies had a serious growth slowdown accompanied by net margin contraction. Weak fundamentals are to continue in the second half, in particular for discretionary names, but some heavily de-rated stocks offer buying opportunities,” a report issued by Jefferies said.

The Sogo store in always jammed Causeway Bay in Hong Kong. Photo: K.Y. Cheng

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The report said they are positive on staples in the near term, given they reported better top line growth than the discretionary firms, and gross profit margin growth could continue in the second half of 2015.

“Gross profit margins of retailers suffered due to traffic decline and lower merchandising fees. While high marketing and promotion expenses caused by competition are dragging the EBIT margin expansion for most companies in the consumer sector, “the report said.

Specifically, top picks by Jefferies are fast noodle and drink producer Tingyi, personal hygiene and skincare expert Hengan, nutrition and baby care products provider Biostime, dairy producers China Shengmu, and China Modern Dairy, as well as sportswear brand Xtep.

On the negative side of the ledger, the report rated Tsui Wah, Belle, and Sa Sa as a sell.

“In the details, sales of jewellery, watches and clocks remained contractionary, down 5 per cent YoY. Although the sales contraction has narrowed, we expect demand to continue to face headwinds from weak in-bound tourism and equity market correction,” a report issued by Credit Suisse said.

It said retail sales volume rose 1.9 per cent on a year on year base in July, weaker than the 2.8 per cent year-on-year increase expected by consensus estimates. In value terms, retail sales were down 2.8 per cent year on year, compared to the 0.4 per cent YoY fall in the previous month.

The difficult situation is now compounded by the devaluation of mainland’s currency. None of my close friends have visited Hong Kong in the last three months, even one who lives within spitting distance in Shenzhen. The lady who used to visit Hong Kong twice a month and bring back facial cream, baby formula, as well as watches for her friend has changed gears and is now going to Japan.

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