Hong Kong retail sales:Dec beats;arrivals turn positive

Event

December Hong Kong retail sales declined 2.9% YoY, beating the consensusestimate of a 4.9% YoY decline. This marks the 22nd consecutive month of aretail sales decline. On a month-over-month basis, the decline narrowed fromthe -5.4% seen in November. The continual improvement in retail salesreinforces our view that HK retail sales have troughed and retailers are able tosee operating leverage on the back of rental reductions.

Impact

December retail sales growth moderated to -2.9% YoY from -5.4% inNovember. Retail sales value and volume declined 2.9% and 2.8%,respectively, beating consensus estimates of -4.9% in value and -5% involume. The sales decline for jewellery and luxury item turned to a positivesingle-digit percent, at 2.3%, breaking the negative streak of 26 months. Aftergoing through a tough comparison base triggered by the mini gold rush thatoccurred in the prior year, the comparison base in 4Q16 was restored tonormal. In accordance with our previous notes, we believe December’sgrowth in jewellery will prevail.

Department stores and wearing apparel back to negative growth. Retailsales (excluding gold and jewellery) declined 4% in December, largelyremaining the same as November’s -3.5%. Department store sales droppedback to -3.2% YoY in December from 1.7% YoY in November. In volumeterms, the improvement from the previous two months ended with -3.3% inDecember. We believe Sogo’s thankful week in November attracted most ofthe consumption. The growth in footwear’s sales also ended its positive run ofthree consecutive months, coming in at -0.6%. Wearing apparel turned to-4.2% in December from 4.2% in November. Alcoholic drinks & tobaccoincreased by 4.9%, turning from -0.8% in the previous month.

Tourist arrivals turn positive. Hong Kong tourism arrivals saw 5.4% YoYgrowth in December, a continued improvement from -9.4%/- 3.0%/-2.4%/-2.1% in August/September/October/November 2016. Mainland Chinesetourist arrivals also saw growth, at 6.1%, for the current month. Total touristsvisiting Hong Kong in 2016 decreased 4.5% YoY, yet the positive growth inDecember 2016 is encouraging, as the magnitude is the highest in the past 22months. We remain confident about HK jewellers, especially SSSg for 2H16,as peak season is approaching and with an easier comparison base.

Outlook

We reiterate our positive view on the luxury sector as we expect it can benefitfrom the improving trends and favourable rental expense control. We reiterateour Outperform ratings on Prada (1913 HK, HK$31.60, Outperform, TP:HK$33.00), Chow Tai Fook (1929 HK, HK$6.86, Outperform, TP: HK$7.50),Luk Fook (590 HK, HK$24.70, Outperform, TP: HK$25.00) and Chow SangSang (116 HK, HK$15.90, Outperform, TP: HK$19.00) given the improvementin SSSg and margins.

We also reiterate our Outperform rating on Lifestyle (1212 HK, HK$10.22,Outperform, TP: HK$15.00) given its strong FCF, high commission rate andimprovement in CWB and TST Sogo.