HK Retail Sector Monthly:Oct sales beat

Oct retail sales beat Retail sales fell 2.9% YoY in Oct, above consensus for a 5.2% decline and making it the best performing month in 2016. The improvement was mainly due to the narrowing decline in mainland visitor arrivals and increased gold product purchases in early Oct amid the decline in price for the metal. The decline remained volume driven in Oct (volume down 2.7% YoY). By category, comparing Oct with Sept, jewelry saw the biggest improvement in sales growth (from -12% in Sept to flat in Oct), followed by department stores (from -2% to -1%). In contrast, apparel sales softened slightly (from +2% to -4%), followed by cosmetics (from +1% to -2%).

    Mainland visitor arrivals softened after Golden Week Mainland visitor arrivals fell 4% in Oct, a slight improvement on the 5% decline in Sept. Momentum softened after seeing 7% growth during the Golden Week Holiday. The recent strengthening of the US dollar against other Asian currencies could present challenges for the HK retail sector.

    Sector outperformed in Nov Shares across the sector rose 3% in Nov (vs the HSI’s 1% decline). Jewelry and watch retailers continued to lead the rally. Oriental Watch (398 HK, NR) surged 21%, followed by Chow Tai Fook (+15%, 1929 HK, Underperform), I.T (+8%, 999 HK, Buy) and Chow Sang Sang (+6%, 116 HK, Buy). Jewelry and watch names benefitted from a sales recovery on a low base and rental cost reductions, as a large portion of stores are located at street level. Luk Fook (590 HK, Hold) fell 1%. If the recent gold price weakness continues, it could hurt the GPM of its gold products due to its low hedging ratio of 20-25%.

    What to watch Weather: the warm weather in Dec 2015 hurt SSS and GPM at apparel retailers. Apparel retailers such as I.T would benefit if the weather normalizes this Dec.

    Outlook According to the HKRMA, most of its members expect low single-digit decline to flat sales value in Nov and Dec. Looking into 4Q16 and 1Q17, we still believe the decline in HK retail sales could narrow further due to the low base and recovering tourist arrivals. Although the declining purchasing power of mainland tourists remains a concern, we expect an earnings recovery for retailers that have good growth in China/overseas markets and a stabilizing HK business. We maintain our Buy ratings on I.T (999 HK) and Chow Sang Sang (116 HK), Underperform rating for Chow Tai Fook (1929 HK) and Hold rating on Luk Fook (590 HK).