We reckon that the retail sales growth for next year should be more moderate as compared to the strong growth in 2012 given a slower economy across the board. This is in line with our in-house economic forecasts where we are anticipating lower private spending growth of 6.9% for 2013 as compared to the stronger growth of 8.1% for 2012. We are also cautious on the regional players as the slowdown of their retail operations  in the other regions, especially in China and Vietnam, will likely drag down the performance of these regional retailers. As such, we are downgrading our OVERWEIGHT call on the Consumer Retail sector to NEUTRAL. We have MARKET PERFORM call on the big market capitalisation stocks such as AEON (TP: RM10.70) and PARKSON (TP: RM4.86) while our OUTPERFORM calls are  on the smaller cap stocks like AMWAY (M) (TP: RM11.68) and ENGKAH (TP: RM4.02).

Pretty good 2012 but anticipating a slower 2013. We anticipate the retail sales growth to moderate next year as consumers remain cautious amid the slowing economy. This is in line with our in-house economic forecasts where we are anticipating la ower private spending growth of 6.9% for 2013 as compared to the stronger growth of 8.1% for 2012. Nevertheless, this year remains a good year for retailers as shown in the consumer sentiment index, where 1Q and 2Q readings grew 5.6% and 6.5% YoY respectively. Furthermore, the Malaysian Retailer-Chains Association ('MRCA') has also revised its revenue growth projection for this year higher from 5% to 6%, moving in sync with the retail sales growth projection of 6% by the Malaysian Retailers Association ('MRA'). 

Challenging times ahead for regional players. Regional retail sales are expected to ease further across many markets due to the slowing economies worldwide, which has caused consumers to cut down on some discretionary spending, especially in China and Vietnam. There was a decrease in consumption demand and retail turnover in Vietnam while China has registered slower growth in its retail sales YoY in recent quarters. Moving in sync with the trend, the two regional operations of Parkson have also been affected. Due to this, we recently downgraded Parkson to a MARKET PERFORM call with a lower TP of RM4.86.

Leveraging on property management services for higher margin. Suburban areas hae seen developers building shopping centres in these areas such as Setia City Mall, Nu Sentral and Paradigm Mall. Such shopping malls have been a success to cater to the population in the surrounding neighborhoods. Taking the cue, AEON and Parkson have also been targeting the smaller towns to build its own shopping centres. For example, AEON (MP; TP: RM10.70) has three developments in the pipeline separately in Sungai Petani, Bukit Mertajam and Kulai to cater to the untapped market of the populations in these areas ranging from 160k to 450k. These new shopping centres will add the group's total outlets to more than 21 in Malaysia. Parkson (MP; TP: RM4.86) has also adopted a similar business model and had opened its first self-owned mall called KL Festival City last  year. It had recently also bought a land in Melaka for the future development of a shopping mall.       

Organic growth.  Meanwhile, MDTCC (Ministry of Domestic Trade, Co-operatives and Consumerism) expects direct selling to grow to RM10b worth by 2015. On a straight-line  basis, this will translate to an estimated 10% growth for this year from RM6.5b in FY10, which is higher than our more conservative projection of a 6.2% sales growth in FY12 for AMWAY (M) (OP; TP: RM11.65), in line with the retail sales growth. We reckon that the 10% organic growth will be partially contributed by a conservative 2% growth per annum in the number of valid direct selling licenses approved in Malaysia (refer to chart on next page).