Hong Kong retail sales value plunged by 23% in August, the worst ever recorded since 1988 (during the Asian Financial Crisis). The data was also far below Bloomberg consensus estimate of 14%, as ongoing protests and the China-US trade war took a heavy toll. In a report dated 2 October, Macquarie Equities Research (MQ Research) shares its view that Hong Kong’s tourist arrivals and retail sales will continue to be under pressure in September and October.

Event

• Hong Kong (HK) retail sales value and volume slumped by 23% and 25.3% year on year (YoY) in August, far below Bloomberg consensus estimate of 14% and 17.8% declines, while worsening month-on-month (MoM) from declines of 11.5% and 13.1% in July. This is the worst single-month retail sales performance since records began in 1982, as tourist arrivals plunged by 39% YoY due to the social unrest. MQ Research believes tourist arrivals and retail sales will continue to be under the pressure in Sep/Oct given the limited visibility for the situation to stabilise.

Impact

• Gold and jewelry sales almost halved. Retail sales of jewelry, watches, and luxury items nearly halved with 47.4% YoY decline in August, worsening sharply from a 24.3% dip in July. One of the leading gold/jewelry retailers mentioned that July same-store sales growth (SSSg) down 30-40%, August down 50-60% and September decline falls in between July/August numbers. The August result coincides with MQ Research’s previous expectation of a sequential deterioration. In MQ Research’s view, the gold/jewelry retailers are likely to negotiate down the rent or close down some shops to control the costs, as the social unrest persists. Therefore, the rental savings benefit is likely to appear in 2020.

• Cosmetics and department stores saw 30% sales declines. Retail sales of cosmetics saw a 30% YoY decline in August, much worse than the 16.5% decline in July. This echoes Sa Sa’s (178 HK, HK$1.74, Neutral, TP: HK$1.70, Sunny Chow) profit warning with HK/Macau sales down 32% YoY in August. Department store sales were also down 30% YoY, worsening from a 10.4% decline in July, echoing Lifestyle (1212 HK, HK$8.17, Outperform, TP: HK$14.30) management’s expectation of a double-digit SSSg decline in August. MQ Research believes most of the international brands’ HK exposure will see the similar 30-40% decline in recent months.

• Tourist arrivals plunged by 39% YoY in August. Mainland tourist arrivals decreased by 42.3% YoY. For September, news reported that hotel occupancy rates slumped 30% YoY, which implies tourist arrivals should continue to be under the pressure. Meanwhile, on Oct 1, the first day of 2019 Golden Week holiday, Mainland tourist arrivals dived by 62.4% YoY to only 93k.

Outlook

• MQ Research expects HK retailers’ share prices will continue to be under the pressure as HK’s social unrest weighs on their performance.

Source: Macquarie Research - 3 Oct 2019