Hong Kong retail sales:Gold price rally adds to sector woes

Event

June Hong Kong retail sales decline 8.9% YoY, missing the consensus estimateof an 8.1% YoY decline. The decline, continuing the negative streak of 16consecutive months, widened from -8.3% in May 2016. Despite the decline inmainland China visitor arrivals moderating to -3.8% YoY in June from -8.3% inMay, we believe the outlook remains cloudy in light of rising popularity of overseastravel for both Hong Kong and mainland residents. Overall, our bearish view onHong Kong retailers remains unchanged and we expect operating deleverage topersist amid the current sluggish market environment.

Impact

June retail sales growth declined 8.9% YoY from -8.3% in May. Retailsales value and volume declined by 8.9% and 9.6%, missing the consensusestimates of -8.1% in value and volume of -8.5%, respectively. The decline injewellery and luxury item sales continued to widen from -18.6% in May to -20.4%. Given that jewellery sales growth has been in negative territory for thepast 21 months, we don’t expect to see positive growth any time soon. Ashighlighted earlier here, the gold price rally drove customers away frompurchasing gold products. This was well reflected by the 20.7% YoY decline injewellery retail sales volume in June. 2H16 remains tough for the gold/jewellery segment as it has a high comparison base with the prior year givena mini gold rush in July-August 2015. The rest of retail sales registered a6.3% decline in June vs the 6.2% decline seen in May.

Luxury & jewellery hit by gold price rally yet apparel improved. Junedepartment store sales fell by a steeper -10.5% vs -5.9% YoY in May. Involume terms, the decline also expanded from -3.6% in May to -8.9%.Jewellery and watch sales fell 20.4% YoY, widening from May’s -18.6%. Thedouble-digit fall indicated consumer sentiment remains challenging with muteddemand for gold and jewellery. In volume terms, the drop was 20.4% YoY inJune vs. -18.6% YoY in May. Clothing apparel improved significantly with0.6% YoY decline from -5.7% in May.

Tourism and consumer sentiment gloomy. The decline in overall HK touristarrivals narrowed to -1.7% YoY in June from -6.4% in May. The decline inmainland China tourist arrivals moderated to -3.8% YoY while both ChineseIVS and same-day visitors continued to report high-single-digit to double-digitdeclines. Despite an improving trend in tourist arrivals, we are concernedabout lower purchasing power, based on our industry checks. We remaincautious on both the outlook for arrivals and consumer sentiment amidvolatility in financial markets and uncertainty in the global economy afterBrexit.

Outlook

Sa Sa and the gold & jewellery sector are potentially the biggest losers fromfalling mainland tourist arrivals and sluggish domestic consumption. Thesector had earlier experienced a strong rally on the back of the gold priceuptick. However, we still do not see fundamental support for the share pricerally. We maintain our cautious view.