Hong Kong retail sales:Easter eggs buried…

Event

March Hong Kong retail sales declined 9.8% YoY, missing the consensusestimate of an 8.8% YoY decline. The drop narrowed from -13.6% in Jan-Feb2016. Chinese visitor arrivals continued to decline (7% in Mar) as a weakerYen drew tourists away from Hong Kong and domestic residents wentoverseas, especially to Japan, during the holidays. We believe the poor datawas not purely driven by weak consumer sentiment in the gold and jewellerysector as retail sales value (excluding gold and jewellery) dropped by 8%. Weremain pessimistic on Hong Kong retailers and expect continued operatingdeleveraging due to their weak top line stemming from lacklustre demand.

Impact

March retail sales narrowed from -13.6% in Jan-Feb to -9.8% YoY. Retailsales value and volume declined by 9.8% and 8.8%, respectively, with valuemissing the consensus estimate of -8.8% and volume missing consensus of-6.9%. The drop in jewellery and luxury item sales slightly moderated from-24.2% in Jan-Feb to -20.3%. Despite the moderation, the decline in salesgrowth of jewellery remained in double digit %, marking a negative streak of19 consecutive months. The remainder of retail sales dropped 7.7% vs 11.1%in Jan-Feb.

Luxury & jewellery and department store sales stayed in double digitdecline. March department store sales were down 5.4% YoY, narrowing from-12.3% in prior months. Volume was down 3.5%, improving 7.7ppts from Jan-Feb. Jewellery and watch sales declined by 20.3% YoY, moderating from Jan-Feb’s -24%, implying no sign of improvement in consumer sentiment towardspurchasing gold and jewellery. Volume decreased 17.7% YoY, compared to-18.6% in Jan-Feb. The drop in clothing sales remained approximately thesame at -11% when compared to prior months.

Declining visitation and consumer sentiment. According to HKEJ,Mainland Chinese tour groups to Hong Kong plunged 49% YoY, adding to theconcerns of the local retail sector. Besides, the persistently weak consumersentiment cast a shadow over the recovery of the retail industry. The financialmarket turmoil and property market correction, as well as increased concernsover imminent layoffs, is causing spending to be conservative. Referring toHKET, the 4-day Easter holidays encouraged Hong Kong people to traveloverseas, with over 80% of group tours signed up. Japan continued to be apopular location amid the weaker Yen and the season for Sakura. Not onlyChinese tourists, but we believe local Hong Kong residents would have alsoused the long weekend to travel rather than staying at home. The near-termoutlook for retail sales will remain constrained by the weak inbound tourismperformance and uncertain economic prospects. The 4QFY16 operationalupdate announced by Chow Tai Fook and Luk Fook earlier echoed thegloomy outlook for the Hong Kong retail environment.

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.