Quantify the concern over retail space oversupply. In this joint report by
China consumer and property research teams, we believe there are two
long-term structural concerns weighing on investors’ minds: (1) retail space
oversupply and (2) e-commerce gaining channel share (see Fast-growing
online shopping, dated 13 November). In this joint report by consumer and
property teams, we try to quantify the oversupply issue, through presenting a
bottom-up analysis of the 13 major cities and their submarkets (covering
more than 55-80% of total retail space of the major Hong Kong-listed
department stores). Click here for the separate chart book.
■ Hangzhou, Nanjing and Wuxi are the safe harbour. We believe overall
China is oversupplied, when we compare China’s current supply/demand
dynamics with that of the US in 1973. Within the country, we believe Hangzhou,
Nanjing and Wuxi are the safe harbours, in terms of new store build-up,
GDP/income per capita, vacancy rates, rental levels and growth potential.
Among the major Hong Kong-listed department stores, we conclude that Intime
and Golden Eagle have greater exposure to attractive cities/submarkets.
■ Be selective in stock picking. We anticipate consumption demand to
bottom out from the trough in 1Q13. We prefer department stores that: (1)
are located in good cities/submarkets; (2) have greater weighting of 2- to 5-
year-old stores (see Looking for the sweet spot); and (3) have proven
execution skills. Within the department segment, our pecking order is: (1)
Intime (initiating coverage with an OUTPERFORM); (2) Golden Eagle
(OUTPERFORM); (3) Springland (OUTPERFORM) and (4) Parkson
(NEUTRAL). Belle (OUTPERFORM, multi-brand multi-channel, no big
structure issues) remains our top pick in the China consumer sector.
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