HONG KONG RETAIL SECTOR:Full of challenges

Impending visa policy change

Hong Kong SAR Chief Executive CY Leung stated yesterday (24 February 2015) that he will propose limiting the number of mainland visitors to Hong Kong at the upcoming national congress. It is unclear how, when or even if such a policy might go into effect, but if it did, we believe Shenzhen residents, who currently enjoy year-long multiple-entry visas, would be affected most. In July 2003, China launched the Individual Visitor Scheme (IVS) that allows mainland tourists to visit Hong Kong individually rather than as part of a group tour. The program has since been expanded several times, resulting in growing numbers of mainland tourists and parallel traders in Hong Kong each year. The most impactful change to the IVS has been the expansion of the scheme to launch year-round multiple-entry visas for Shenzhen residents in 2009-2010.

Retail names under pressure

Day visitors from Shenzhen and other Guangdong cities have been the lifeblood of the mass-end segment of Hong Kong’s retail market but uncertainty over the possibility of IVS restrictions will keep HK retail names, particularly mass market cosmetics player Sa Sa (178 HK, Not Rated), under pressure until details are announced. Even though sentiment on the mass retail market as a whole is uncertain, we believe that any IVS changes targeting only the number of per annum Shenzen and Guangdong visitors will have minimal impact on jewelry retailers such as Chow Tai Fook (1929 HK, Neutral) and other high-end retailers.

Sluggish outlook intact

We hold onto our view that political or policy risks have become a major factor in Hong Kong’s retail market. While the low-end or mass market retail segment is most vulnerable to these risk factors, we note that Hong Kong’s jewelry and watch segment and the upscale segment as a whole are facing rapidly growing competition from Europe and Asia for big-spending tourists from mainland China. Initial feedback from Hong Kong-based retailers indicates unexciting CNY holiday sales. For now, we maintain our Neutral rating on Chow Tai Fook, though we note increasing investor interest in this name at the sub-HK$10 level amid expectation of a sales recovery in 2Q calendar 2015 backed by a favorable base effect.