In this report we leave macro aside and focus on bottom-up drivers for
each company that will secure longer-term growth in the consumer space.
We also take the view that a significant recovery in sales in 2013 is
unlikely, so get ready to embrace longer-term single-digit or low-doubledigit
SSSG in the space. We remain positive on select retailers from a
long-term perspective but do not expect an immediate re-rating catalyst to
arrive in 2012 in the form of a strong SSSG pick-up. Retailers indicate a
lackluster 3Q so far, and we believe 3Q SSSG is likely to come in slightly
below 2Q’s. Therefore, the recent outperformance seen in some retailers
over staples is unlikely to continue, in our view. We downgrade Belle to
Neutral, and upgrade Sa Sa to OW. Among retailers, Golden Eagle and
Trinity are still our top picks, but with a longer-term focus as 2H is likely
to be lackluster. Among staples we reiterate China Foods and Mengniu as
our top picks, and we turn incrementally more negative on Hengan.
Rebasing 2013 earnings estimates. Taking the view that a significant
recovery in sales is unlikely in 2013, we cut our 2013 earnings estimates
for retailers on average by 5% (the range is 2-12%). We now expect 14%
earnings growth in 2013 on the back of 16% sales growth. We expect
2013 sales growth to be in line with 2012’s and we do not expect further
pressure on margins next year as we do not think the pricing environment
will worsen further from 2012 levels. Our estimates for China names are
now c5% below Bloomberg consensus on average and on our revised
numbers the space is trading at 12.5x one-year forward P/E.
For retailers, focus on bottom-up drivers. In our analysis, we focus on:
i) SSSG, breaking it up into volume and pricing components; ii) store
penetration opportunities; iii) gross margin potential in the space; and iv)
operating leverage. On the back of this we believe Trinity and Golden
Eagle have decent bottom-up drivers to help secure longer-term growth.
Both of these remain our top picks with a longer-term focus. On the other
hand, we downgrade Belle to Neutral. Given the strong performance
YTD, we find its valuations to be uncompelling, especially given the
relatively limited store expansion potential. We upgrade Sa Sa to OW
given its strong sales performance YTD and as it is a major beneficiary
of daily Chinese tourist arrivals.
Staples: more negative on Hengan; OW on China Foods and
Mengniu. The staples space is now trading at 20x one-year forward P/E.
We reiterate China Foods and Mengniu as our top picks and turn
incrementally more negative on Hengan as we are becoming concerned
about the oversupply issue in the tissue segment. We reduce our earnings
estimates for Hengan by 5%.