Hong Kong retail sales:Santa Clause,we miss you…

Event

December Hong Kong retail sales declined 8.5% YoY, missing the consensusestimate of a 4.3% YoY decline. The drop widened further from -7.8% in theprevious month. Chinese visitor arrivals continued to decline significantly by adouble digit percentage (15.5% in Dec) as a weaker Yen drew tourists awayfrom Hong Kong. We believe the poor result was not purely driven by theweak consumer sentiment in the gold and jewellery sector as retail salesvalue (excluding gold and jewellery) dropped by 6.3%. We remain cautious onHong Kong retailers and expect continued operating deleveraging due to theirweak top lines stemming from lacklustre demand.

Impact

December retail sales declined from -7.8% in November to -8.5% YoY.Retail sales value and volume declined by 8.5% and 6.1% respectively,missing consensus estimates of a -4.3% value and a -2.1% volume decline.The drop in jewellery and luxury item sales slightly moderated from -20.6% inNovember to -17% in December, showing that Christmas did not help boostsales of luxury items. The remainder of retail sales dropped 6.3% from 4.6%in October. YTD, retail sales are down 3.7% YoY.

December luxury & jewellery sales stayed in double digit decline withdepartment stores seeing further decline. December department storesales were down 12.3% YoY, down 7.5ppts from -4.8% in November. Volumewas down 12.5%, decreasing 7.2ppts from November. Jewellery and watchsales declined by 17% YoY, slightly moderating from November’s -20.6%, asthere was no sign of improvement in weak consumer sentiment in purchasinggold and jewellery. Volume decreased 10.8% YoY, compared to -17.9% inNovember. Clothing apparel saw a sharp drop to -12.1% YoY compared to-8.8% in Nov, reflecting that a warmer December has hindered sales.

§ Weather was warm, but Christmas felt cold. Hong Kong, which used tomark the peak of consumption during this period, suffered significantly.According to JTA, the number of Chinese tourist arrivals to Japan recorded a107% YoY increase with per-capita spending up 23% YoY to JPY 284K/person. Similarly, the number of Hong Kong tourist arrivals increased by 65%YoY with per-capita spending up by 17% to JPY 172K/ person. We believeChinese tourist overseas consumption trends will continue given that foreigncurrencies remain relatively attractive compared to the HK$, which is peggedto the US$. With both locals and tourists being attracted to Japan, we expecta grimmer picture for Hong Kong retail in the foreseeable future.

Outlook

Sa Sa and the gold & jewellery sector are the most likely losers of decliningChinese tourist arrivals and weak domestic consumption. The weak luxuryretail environment in Hong Kong should also have negative implications forPrada and Samsonite, for which we have Underperform ratings.